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Annual Report 2003
Annual Report 2003
ASML Mission
Providing leading edge imaging
solutions to continuously improve our
customers’ global competitiveness
For 2003, ASML has made a change in the way we present
information in our Annual Report.
Since the Company was founded in 1984, ASML has
embraced good corporate governance and exemplified
consistency and transparency in our public disclosures.
Recent developments in the Netherlands and in the
United States include new and amended reporting
regulations for publicly listed companies such as ASML.
As a result, the Company has decided to include the entirety
of “Form 20-F” in our Annual Report for 2003. Form 20-F is
required by the Securities and Exchange Commission (SEC)
in the United States for companies like ASML, a foreign
private issuer on the NASDAQ stock market.
And so, this year’s Annual Report looks different.
But nowadays, in the context of corporate governance
and financial accountability, ASML believes such a change
in presenting the Company’s information is better for
shareholders.
In 2002, for example, the Company reported three separate
sets of annual financial statements. One report was based
on accounting principles generally accepted in the
United States known as U.S. GAAP. Another statement
was for Dutch statutory purposes based on accounting
principles generally accepted in the Netherlands known as
Dutch GAAP. Finally, the Company filed a third statement
using Form 20-F based on U.S. GAAP.
For 2003, we have simplified our reporting into two sets
of financial statements. One is the Dutch statutory report
based on Dutch GAAP. The other is Form 20-F based on
U.S. GAAP.
In this report, you will find Form 20-F in its entirety.
It is divided into three parts:
• Part One provides detailed information about the Company
for different items such as risk factors specific to ASML
and the semiconductor industry, operating results,
financial review and prospects.
• Part Two discloses information regarding corporate
governance and auditor independence.
• Part Three contains financial statements for the years
2001, 2002 and 2003 respectively.
The Company believes that Form 20-F provides its
shareholders with the most complete, consistent and
transparent information about the Company and its
operations.
Why does ASML’sAnnual Report for2003 look different?
Contents
4 About ASML
5 ASML Corporate Achievements 2003
6 Board of Management
7 Message to Our Shareholders
10 Supervisory Board
12 Report of the Supervisory Board
18 Corporate Governance
24 Information and Investor Relations
25 ASML Worldwide Contact Information
27 Form 20-F
In this report the expression “ASML” is sometimes used
for convenience in contexts where reference is made to
ASML Holding N.V. and/or any of its subsidiaries in general.
The expression is also used where no useful purpose is
served by identifying the particular company or companies.
“Safe Harbor” Statement under the U.S. Private Securities
Litigation Reform Act of 1995: the matters discussed in this
document include forward-looking statements that are
subject to risks and uncertainties including, but not limited
to, economic conditions, product demand and industry
capacity, competitive products and pricing, manufacturing
efficiencies, new product development, ability to enforce
patents, availability of raw materials and critical
manufacturing equipment, trade environment, and other
risks indicated in filings with the U.S. Securities and
Exchange Commission.
© 2004, ASML Holding N.V. All Rights Reserved
ASML is the world’s leading provider of lithography systems
for the semiconductor industry, manufacturing complex
machines critical to the production of integrated circuits or
chips.
ASML technology transfers circuit patterns onto silicon
wafers to make every kind of chip used today and
tomorrow. As digital products, such as PCs and mobile
phones, become more pervasive, the technology behind
chip manufacturing becomes more advanced.
With each generation of chips, personal and business
products become smaller, lighter, faster, more powerful,
more precise, more reliable and easier to use. In parallel,
the global semiconductor industry is pursuing its long term
roadmap for imaging ever-finer circuit lines on silicon wafers.
Core business: semiconductor lithography
The technology behind our business is known as lithography,
and we have always been at the leading edge of that
technology. ASML systems – called steppers and Step & Scan
tools (scanners) respectively – use a photographic process
to image nanometric circuit patterns onto a silicon wafer,
much like a camera prints an image on film.
ASML researches, develops, designs, manufactures,
markets and services lithography systems used by the
semiconductor industry to fabricate state-of-the-art chips.
Most of the major global semiconductor manufacturers are
ASML customers. For chipmakers, technological
advancement in imaging means increased manufacturing
productivity and improved profitability.
The ASML TWINSCAN™ lithography system exemplifies our
technology leadership. It is the industry’s only dual-stage
system that allows exposure of one wafer while
simultaneously measuring another wafer. This gives our
customers greater productivity and improved yield when
producing high volumes of chips.
ASML is committed to providing customers with the right
technology that is production-ready at the right time.
Doing so enables our customers and their customers to
sustain their competitive edge in the marketplace.
ASML Special Applications focuses on solutions for
application markets, where it has evolved as the lithography
market leader in serving the Thin Film Head and Compound
Semiconductor industry. We have also developed expertise
to certify and relaunch previously used ASML equipment
into the market.
ASML MaskTools provides innovative mask technologies
and software products that extend the limits of optical
lithography for chip manufacturing at 90 nanometer and
beyond. These are optimized for ASML’s advanced
scanners, enabling the delivery of complete and integrated
mask design to wafer imaging solutions.
ASML Optics is an extreme precision optical foundry
offering design-to-image solutions for the semiconductor
and optical manufacturing industries. Expert resources and
capabilities in optical design and manufacturing, cleanroom
assembly, systems engineering, test and metrology offer
solutions across a range of application requirements.
ASML facilities, like its customers, are worldwide,
in 14 countries and over 50 sales and service locations.
We have experts on-site at customer fabrication facilities,
backed by a global pool of ASML engineers and other
professionals.
ASML is not only technically driven, but also expresses
its long-term commitment to the community we live in.
ASML Trust is a foundation that operates in countries where
ASML is present. Its purpose is to extend financial support
for projects that focus on technical education, as well as
charities in general. ASML Trust encourages self-reliance
of parties involved.
Headquartered in the Netherlands
ASML’s corporate headquarters is in Veldhoven,
the Netherlands. The company has lithography research,
development and manufacturing operations in Wilton,
Connecticut, U.S. and Veldhoven, the Netherlands.
Technology development centers and training and application
facilities are located in Asia, Europe and the United States.
ASML is traded on Euronext Amsterdam and NASDAQ
under the symbol ASML.
For more information, visit www.asml.com
4ASML ANNUAL REPORT 2003
About ASML
Technology leadership
• Continued as world leader in market share for revenues of
semiconductor lithography systems, and sustained global
product leadership through our TWINSCAN platform,
the industry’s only dual-stage wafer imaging system that
allows exposure of one wafer while simultaneously
measuring another wafer
• Shipped the first TWINSCAN AT:1200 in July,
the industry’s first high productivity tool for volume
applications at the 80-nanometer line width, and delivered
over a dozen systems in 2003, marking one of ASML’s
fastest ramp-ups ever for a new product introduction
• Launched next generation of our TWINSCAN platform
– XT:1250 – a very high resolution (0.85 numerical
aperture) volume production system that extends
imaging to the 65-nanometer line width on both 200- and
300-millimeter wafers using 193-nanometer wavelength,
while highly friendly for customer facilities: footprint
reduced by 25 percent and facility requirements reduced
by 50 percent
• Announced the industry’s first immersion lithography
system – TWINSCAN XT:1250i – a very high resolution
(0.85 numerical aperture) tool using 193-nanometer
wavelength technology that combines wider focus range
through “wet” imaging along with the proven precision of
“dry” measurement on our dual stage system
• Delivered the industry’s first full-field semiconductor
lithography system using 157-nanometer wavelength
technology to IMEC, Europe’s leading chip consortium
for independent research and development
5ASML ANNUAL REPORT 2003
ASML CorporateAchievements 2003
Customer satisfaction
• Achieved top customer satisfaction ratings: surpassed
every lithography competitor, and ranked number 2 overall
among large suppliers of all types of chip making
equipment, according to VLSI Research, an independent
industry research firm
• Shipped the 100th TWINSCAN system, reaching this
milestone in September and concluding 2003 with
an installed base of over 2000 steppers and scanners
throughout Asia, Europe and the United States
• Established TWINSCAN as a reliable platform in volume
production at customer facilities worldwide through
measurement of Mean Time Between Interrupts (MTBI)
that increased by threefold, bringing MTBI well above the
threshold for customer satisfaction
• Received the industry’s first order for an immersion
lithography system – TWINSCAN XT:1250i – from Taiwan
Semiconductor Manufacturing Company (TSMC), the
world’s largest independent manufacturer of
made-to-order semiconductors
Operational excellence
• Improved cycle time of TWINSCAN from date-of-order to
delivery-at-customer by 33 percent and significantly
reduced TWINSCAN cost of goods
• Generated more than EUR 500 million in cash from
operations during 2003
• Improved the quarterly progression of gross margin, rising
to 29 percent in Q4 2003, while throughout 2003 driving
down selling, general and administrative expenses and
lowering Research and Development costs, net of credits,
by 19 and 4 percent respectively
• Strengthened our balance sheet by reducing debt while
total cash increased
• Addressed non-core activity through divestment of
Thermal operations
6ASML ANNUAL REPORT 2003
Board of Management
Doug J. Dunn (1944)
President,
Chief Executive Officer,
Chairman of the
Board of Management
Appointed in 1999
British nationality
Peter T.F.M. Wennink(1957)
Executive Vice President
and Chief Financial Officer
Appointed in 1999
Dutch nationality
Martin A. van den Brink(1957)
Executive Vice President
Marketing & Technology
Appointed in 1999
Dutch nationality
Stuart K. McIntosh(1944)
Executive Vice President
Operations and President
Lithography
Appointed in 2001
British nationality
David P. Chavoustie(1943)
Executive Vice President
Sales
Appointed in 2000
U.S. nationality
Left to right: Martin van den Brink, Doug Dunn, Peter Wennink, Stuart McIntosh, David Chavoustie
2003 was an unprecedented third consecutive year in the
worst downturn in the history of the global semiconductor
industry. But it was also a year for ASML to accomplish
some of our best work in the 19-year history of the company:
• We introduced the next generation of the world-beating
TWINSCAN system, the XT:1250, a high productivity
leading edge product using 193-nanometer wavelength
technology for imaging 200- as well as 300-millimeter
wafer sizes
• We developed and launched the industry’s first system
based on immersion technology, the TWINSCAN XT:1250i,
an innovative lithography product that replaces the air over
the wafer with fluid to enhance focus and shrink line widths
• We achieved customer satisfaction ratings that surpassed
our lithography equipment competitors and ranked ASML
number 2 among large suppliers of all types of chip-making
gear, according to VLSI Research, an independent firm
• We consolidated our position as the world’s largest
supplier of lithography equipment for the semiconductor
industry
During 2003, ASML used the world’s worst semiconductor
slump to fortify our foundation. The Company vastly
strengthened our core competence: semiconductor
lithography equipment. Lithography is the imaging of
nanometric circuit patterns on a silicon wafer, the material
from which tiny chips (integrated circuits) are made.
Furthermore, everyone at ASML renewed their determination
to manage the company for profits while rooted in a business
strategy of technology leadership, customer focus and
operational excellence. This determination for profitability
was demonstrated in the fourth quarter of 2003 as the
Company turned the corner on market-induced losses of
previous quarters and reported a return to a net profit of
EUR 16 million.
7ASML ANNUAL REPORT 2003
Message to OurShareholders
Embracing structural market changes
The world market for semiconductor fabrication equipment
in 2003 was almost unchanged compared with 2002.
In particular, capital expenditures for lithography systems
remained virtually the same year on year.
In fact, the world market for the number of semiconductor
lithography systems sold in 2003 was around a third of the
peak number in 2000, a hangover that has depressed
customer demand for three straight years. Made-to-order
chip contractors, known as foundries, during 2003 continued
to spend much less on capital equipment compared with
expenditures in 2000. Simply put, ASML’s customer base,
the world’s major semiconductor manufacturers, were
cautious and unwilling throughout 2003 to invest significantly
in new chip-making equipment.
Why? Semiconductor manufacturers depend on demand
in end markets such as computing, information technology,
automotive, consumer electronics and telecommunications,
among other digital products. Nowadays, chip demand in
end markets correlates more closely with macroeconomics
and geopolitics. Now, more than ever, business and
consumer confidence influences chip demand. This marks
a structural change in the global market for designing,
producing and pricing chips.
Increasing the chipmakers’ productivity
ASML is recognized in the semiconductor lithography
industry for our technology leadership. For example,
our TWINSCAN product line, introduced in 2000, is the
industry’s only dual-stage system that allows exposure
of one wafer while simultaneously measuring another wafer.
This means chipmakers increase manufacturing productivity
and improve profitability. Customer acceptance of
TWINSCAN in 2003 brought the total number of systems
installed to more than 120 worldwide.
ASML provides a broad range of lithography solutions for a
growing customer base, including most of the world’s major
semiconductor manufacturers. New ASML products are in
demand, for leading edge 193-nanometer wavelength
technology as well as for 248-nanometer wavelength volume
production. Overall, we offer customers superior value of
ownership for their capital investments. We continuously
update and upgrade that added value through customer
focus. Smaller line widths, and faster and more accurate
imaging, also add value.
Accelerating toward operational
excellence
In 2003, we adjusted to structural market changes.
We also intensified our pursuit of operational excellence.
We discontinued non-core activities by closing track and
divesting Thermal operations. We managed down working
capital, generating more than EUR 500 million in cash from
operations. We reduced total work force by 15 percent.
We lowered the breakeven point for the number of
lithography systems that we manufacture.
We significantly decreased cost of goods for TWINSCAN
systems and will continue to do so. We increased flexibility
so, for example, the cycle time from order to delivery of a
TWINSCAN system improved by 33 percent. We increased
gross margin to 29 percent in the fourth quarter of 2003.
We cut selling, general and administrative costs by
19 percent year on year.
Flexibility in our level of employment, especially in the
Netherlands, and flexibility in addressing customer demand
are central to the Company’s long term pursuit of
operational excellence in a globally competitive, cyclical
industry like ours.
Committed to succeed
Emerging from three years of the chip industry’s deepest,
longest downturn, ASML is aligning company-wide
processes and organizing key functions to face changing
and challenging global market conditions. We are committed
to continued success:
• Streamlining research and development programs
consistent with customer choices and their technology
roadmaps
• Enhancing manufacturing efficiencies through ASML
facilities located in Veldhoven, the Netherlands and Wilton,
Connecticut, U.S.
• Continuing to operate Value Sourcing, the Company’s
established strategy for managing suppliers through
quality, logistics, technology and total cost
• Continuing to deliver world class, value-added imaging
solutions, customer support services and training for
different segments of technological need
• Strengthening the Company’s financial performance
In 2003, we sold 169 lithography systems, with half of our
business in Asia. We maintained momentum in China and
Japan, major markets where our prospects look better than
ever. To keep close to our customers, ASML operates in
14 countries and over 50 sales and service locations around
the world.
We now have the strongest product offering in the history
of the Company. In 2003, we increased the average selling
price for new lithography systems to EUR 9.5 million,
up 7 percent year on year, demonstrating that customers
embrace the premium value in our products. In 2003,
we gained 11 new customers.
Due to measures in debt and cost reduction, alongside
earlier restructuring and other actions, the Company’s
financial position at the end of 2003 is stronger than
a year ago.
The Board of Management regrets the necessity to reduce
work force. To mitigate the human consequences of
doing so, ASML provides assistance to outgoing employees,
including career counsel, outplacement services and job
center resources.
Corporate governance
The Board of Management reiterates the importance that
the Company’s practices and procedures reflect good
corporate governance, notably significant elements such
as independence, accountability and transparency, and we
continually monitor and assess proposals, recommendations,
initiatives and regulations regarding principles and practice
of corporate governance.
In the United States, corporate governance rules have
been issued by the NASDAQ stock market and by the U.S.
Securities and Exchange Commission (SEC) pursuant
to the Sarbanes-Oxley Act of 2002. In the Netherlands,
the Corporate Governance Code as prepared by the
Tabaksblat Committee has been adopted. The Dutch code
8ASML ANNUAL REPORT 2003
applies to ASML as of January 1, 2004, and a more detailed
description appears in this report.
Announcement of retirement
Finally, after 35 years in the semiconductor business, I plan
to retire before the end of 2004. I am 59 years old and have
served in this position since 1999. I am proud of what we
have accomplished at ASML, and I will miss the excitement.
I can assure the Board, employees, customers, colleagues
and shareholders that my commitment to ASML remains
unchanged, and I will work with the Supervisory and
Management Boards on a smooth transition and the timing
of my retirement.
Thanks to the employees
The Board of Management would like to recognize the
employees of ASML. We have people from more than
45 nations who have unified our globally operating
company. We thank them for their contributions,
cohesion and creativity.
Coming out of downturn’s darkness, we see the sunrise of
an upturn. Our people are renewed, ready and committed
to seize the upturn. Together, we will continue to make
ASML successful.
Doug J. Dunn
President, Chief Executive Officer and
Chairman of the Board of Management
ASML Holding N.V.
Veldhoven, January 30, 2004
9ASML ANNUAL REPORT 2003
10ASML ANNUAL REPORT 2003
The Supervisory Board has the following
committees:
Audit Committee
Members: Syb Bergsma (chairman), Henk Bodt, Jan Dekker
Remuneration Committee
Members: Jos Westerburgen (chairman), Henk Bodt,
Syb Bergsma, Michael Attardo
Henk Bodt (1938)
Former Executive Vice
President of Royal Philips
Electronics N.V.
Chairman, first appointed
1995; current term until 2004
Dutch nationality
Michael J. Attardo(1941)
Former President and CEO of
IBM Microelectronics
First appointed 2001,
current term until 2005
U.S. nationality
Supervisory Board
11ASML ANNUAL REPORT 2003
Syb Bergsma (1936)
Former Executive Vice President
Financial Affairs of Akzo Nobel
N.V.
First appointed 1998,
current term until 2004
Dutch nationality
Jan A. Dekker(1939)
Former Chief Executive Officer
of TNO
First appointed 1997,
current term until 2006
Dutch nationality
Peter H. Grassmann(1939)
Former President and Chief
Executive Officer of Carl Zeiss
First appointed 1996,
current term until 2006
German nationality
Jos W.B. Westerburgen(1942)
Former Company Secretary
and Head of Tax of Unilever
First appointed 2002,
current term until 2005
Dutch nationality
Financial
statements
Supervision and
advice
Report of the Supervisory Board
The Supervisory Board has approved the Form 20-F and the Items therein of ASML Holding N.V.
(the “Company”) for the financial year 2003, as prepared and adopted by the Board of
Management and included in this Annual Report. Deloitte & Touche has duly examined
the Company’s financial statements, and their Independent Auditors’ Report is included
in the Form 20-F.
General
The Board of Management of ASML is responsible for the management of the Company.
The role of the Supervisory Board is to oversee and advise the Board of Management in
performing its management tasks and setting the direction of the Company.
During 2003, ASML solidified its position in the global market for semiconductor lithography
systems, despite an unprecedented third consecutive year in the industry’s worst-ever
downturn. The Company strengthened its organization and enhanced its operations consistent
with global market conditions. ASML management and employees around the world have
been preparing during 2003 to take full advantage of a market upturn when it comes.
We support the Board of Management and the clarity of their commitment to secure the
Company’s core semiconductor lithography business. We endorse the Company’s pursuit
of technology leadership while intensifying its focus on customers and maintaining strong
control of its cost base.
Strategy and business review
The Supervisory Board has reviewed ASML business policy and decision making with the
Board of Management regarding the Company’s strategy, human resources, organizational
issues, financial performance, alliances and associated business risks, among other matters.
Throughout 2003, the Supervisory Board has been closely involved with the Board of
Management by means of regular meetings, monthly reports and ongoing consultations.
Contrasted with the semiconductor capital equipment market peak in 2000, the past three
years have slumped deeper and longer than ever experienced in the industry. Facing fierce
competitive pressures and other challenges, the Company has demonstrated creativity and
commitment, doing more work with fewer people and delivering more results with reduced
resources.
Strong management control
During 2003, the Supervisory Board noted measurable improvements in operational
efficiencies, cost control, inventory reduction and cash generation, among other internal
aspects of the Company’s performance. We see that the Board of Management continues to
motivate and mobilize senior managers and employees to strive for operational excellence
while raising levels of customer satisfaction. We have also noted the Board of Management’s
commitment to improve the return on its invested capital.
12ASML ANNUAL REPORT 2003
Corporate
governance
Meetings of the
Supervisory
Board
Human resources
The excellence of any high tech company is a measure of the excellence of its employees.
Therefore, to maintain its successful track record, the Company continues to ensure its ability
to attract and retain the best talent in the world. The Supervisory Board is pleased to see that
the Board of Management is determined to preserve and promote the Company’s unique
culture of individual and team commitment that makes outstanding accomplishments possible.
Restructuring
The Supervisory Board endorsed the Board of Management’s assessment and intended
actions regarding the Company’s reorganization and utilization of resources in view of
structural changes and cyclical conditions in the global semiconductor market. In a painful
but necessary measure, the Company announced in July 2003 a reduction in work force in its
lithography operation. It is critical that ASML calibrates its labor capacity and associated costs
consistent with current and future market conditions.
Despite restructuring, the Company continues to fund research and development programs
appropriately to meet the challenges of offering customers the right technologies at the right
time. However, the Company requires efficiency improvements in R&D efforts, as it does in
the rest of the organization.
Independent members of the Supervisory Board
Like many Dutch public companies, the Company has a two-tier board structure where
independent, non executive members serve on the Supervisory Board, which in turn
supervises and advises the members of the Board of Management in performing its
management tasks. Supervisory Board members are prohibited from serving as officers
or employees of the Company.
Corporate governance developments
The Supervisory Board assists the Board of Management in its continuing efforts to ensure
that the Company’s practices and procedures reflect good corporate governance and comply
with applicable U.S. and Dutch corporate governance requirements and best practices.
A more detailed description appears in this report.
The Supervisory Board met six times in the course of 2003. Members of the Supervisory
Board also held two regular meetings with the Works Council in the Netherlands during 2003.
In addition, members of the Supervisory Board met several times with the Works Council
regarding the workforce reduction announced in July 2003.
The Supervisory Board met once, without the Board of Management present, to discuss the
functioning of the Supervisory Board and its individual members; the relationship with the
Board of Management; the performance and composition of the Board of Management as well
as performance and succession of its individual members, among other matters.
13ASML ANNUAL REPORT 2003
Composition of
the Supervisory
Board
The Supervisory Board further discussed its own profile and rotation schedule and reviewed
its own composition. In addition, there were frequent consultations between the Supervisory
Board and the Board of Management outside their regularly scheduled meetings.
Mr. J.A. Dekker and Mr P.H. Grassmann retired by rotation on March 25, 2003 and were
reappointed.
Mr. H. Bodt and Mr. S. Bergsma will be retiring by rotation on March 18, 2004. Mr. H. Bodt
has informed the Supervisory Board that he is available for reappointment on March 18, 2004.
Mr. S. Bergsma informed the Supervisory Board that he was not available for reappointment.
The Supervisory Board has furthermore resolved to expand the Supervisory Board from six to
a maximum of eight members. The Supervisory Board would like to appoint Mr. F. Fröhlich
and Mr. A. van der Poel, who both fit very well in the profile of the Supervisory Board as
amended. Mr. F. Fröhlich, who has a substantive financial background, would fit ideally in the
profile of the “financial expert,” while Mr A. van der Poel would bring a wealth of knowledge
with his extensive international experience in the semiconductor industry. For further details
and a biography of the current members of the Supervisory Board, reference is made to Item
6.A. on Form 20-F.
14ASML ANNUAL REPORT 2003
Supervisory
Board
Committees
The Supervisory Board has a Remuneration Committee and an Audit Committee.
Members of these committees are appointed from and among the Supervisory Board
members. In 2003, the Audit Committee met seven times, each time with the external auditor
present, and the Remuneration Committee met twice.
Audit Committee
Pursuant to the Audit Committee’s revised procedures, prior approval of the Audit Committee
is now required for any significant non-audit services to be rendered by the audit firm.
The implementation of this procedure in 2002 is consistent with revised independence
requirements issued by the Royal Dutch Institute of Chartered Accountants (Royal NIVRA)
and the Sarbanes-Oxley Act and rules proposed by the SEC. The current members of our
Audit Committee are Syb Bergsma (chairman), Henk Bodt and Jan Dekker.
The members of the Audit Committee are all independent, non-executive members of the
Supervisory Board. As a consequence of certification requirements under the Sarbanes-Oxley
Act, the Audit Committee has also formulated a Control Enhancement Project to further
improve the Company’s internal control framework.
15ASML ANNUAL REPORT 2003
Remuneration of
the Supervisory
Board
Composition of
the Board of
Management
Remuneration
of the Board
of Management
Remuneration Committee
The current members of the Company’s Remuneration Committee are Jos Westerburgen
(chairman), Henk Bodt, Syb Bergsma and Michael Attardo.
The remuneration of the Supervisory Board members is described in Item 6.B. on Form 20-F.
The remuneration of the members of the Supervisory Board is not linked to the financial
results of the Company. None of the members of the Supervisory Board personally maintain a
business relationship with the Company other than as a member of the Supervisory Board.
The General Meeting of Shareholders determines the remuneration of the members of the
Supervisory Board.
Michael J. Attardo owns 34,722 options on shares of the Company. Peter H. Grassman owns
3,000 shares of the Company. None of the other members of the Supervisory Board own
shares or options on shares of the Company.
The Board of Management consists of five members. There were no changes to the Board of
Management in 2003. Details of the remuneration of the Board of Management in 2003 are
described in Item 6.B. on Form 20-F. For further details and a biography of the members of
the Board of Management, reference is made to Item 6.A. on Form 20-F.
On January 16, 2004, Doug Dunn announced his decision that he will retire as President, Chief
Executive Officer and Chairman of the Board of Management of ASML in the course of 2004.
The Supervisory Board much regrets but also respects Doug Dunn’s decision and has formed
an ad hoc selection committee to find a successor.
The Remuneration Committee prepares and the Supervisory Board establishes the Company’s
remuneration policy for members of the Board of Management, and it oversees the
development and implementation of compensation and benefits programs for members of the
Board of Management.
In proposing to the Supervisory Board the actual remuneration elements and levels applicable
to the members of the Board of Management, the Remuneration Committee considers, among
other factors, the remuneration policy, the desired levels of and emphasis on particular
aspects of the Company’s short and long term performance and its current compensation and
benefits structures and levels benchmarked against the relevant markets. External
compensation survey data and, where necessary, external consultants are used to benchmark
our remuneration levels and structures. Furthermore, the Remuneration Committee reviews
and proposes to the Supervisory Board corporate goals and objectives relevant to the
compensation of all members of the Board of Management. The Committee evaluates the
performance of members of the Board of Management in view of those goals and objectives,
and makes recommendations to the Supervisory Board regarding the resulting compensation
levels of the members of the Board of Management based on this evaluation.
The Remuneration Policy for the Board of Management of the Company shall be submitted to
the General Meeting of Shareholders on March 18, 2004 for discussion and adoption.
16ASML ANNUAL REPORT 2003
Recognition for
ASML employees
The remuneration of members of the Board of Management is described in Item 6.B. on
Form 20-F.
2003 was an unprecedented third consecutive year of challenging global market conditions
for everyone at ASML. We support the Board of Management, underscore their leadership
and embrace their strategic insights to help strengthen and sustain the business success
of ASML on behalf of all stakeholders worldwide.
The Supervisory Board also wishes to recognize the valuable contributions made by everyone
associated with the Company during 2003, and in particular, we express our gratitude to the
employees of ASML.
The Supervisory Board,
Veldhoven, January 30, 2004
17ASML ANNUAL REPORT 2003
18ASML ANNUAL REPORT 2003
Corporate Governance
ASML continuously monitors and assesses applicable corporate governance rules, including
recommendations and initiatives regarding principles of corporate governance. These include
those that have been developed in the United States both by NASDAQ and by the U.S.
Securities and Exchange Commission (“SEC”) pursuant to the Sarbanes-Oxley Act. Some of
those rules and/or principles are already applicable and have been implemented by ASML
over the past years; others will need to be implemented over the coming years.
In addition, the Tabaksblat Committee in the Netherlands has issued a new Corporate
Governance Code (the “Code”) in December 2003, which Code is effective for ASML as of
January 1, 2004. The Code is applicable for all companies that are admitted to an officially
recognized stock exchange and that are registered in the Netherlands. ASML believes that
the Code in principle aims at similar objectives as the U.S. corporate governance principles,
although differences exist with regard to the approach taken and areas covered.
The Code contains principles with regard to corporate governance as well as best practice
provisions based on those principles. Beginning with the annual report over the financial year
2004, companies subject to the Code are expected to report on the application of the
principles in the Code, as well as on compliance with the best practice provisions.
Reporting is based on the “apply or explain” rule.
The Tabaksblat Committee recommends that the companies concerned outline in the annual
report over the financial year 2003 how they expect to apply the Code and which issues they
foresee in that respect.
Headings refer to headings in the Code. For the full text of the principles and best practices,
reference is made to the text of the Code.
Below is a general overview of ASML’s current corporate governance practices in view of the
principles as laid down in the Code. ASML already applies most of these principles and is in
the process of reviewing in detail whether further implementation of the principles will take
place through the best practices or through other methods.
The annual report over the financial year 2004 will contain a comprehensive report in
conformance with the Code. Furthermore, in the course of 2004, ASML will adjust its website
in accordance with the requirements of the Code.
Principle: Responsibility Corporate Governance
ASML agrees that the Board of Management and the Supervisory Board are responsible for
the corporate governance structure and compliance with the Code. ASML will continue to
include and describe its corporate governance structure in its annual report and shall to the
extent possible adhere to the Code in this respect.
In addition, ASML welcomes discussions with its shareholders regarding this subject.
ASML’s current
corporate
governance
practices
I. Compliance
with and
enforcement
of the Code
II. Board of
Management
II.2 Remuneration
Principle II.1 Role and Procedure
ASML endorses the principle regarding the role and procedure of the Board of Management
as laid down in this paragraph. The Board of Management is responsible for managing the
Company and to achieve its aims, strategy, policies and results and is accountable for this
to the Supervisory Board and the shareholders. ASML’s Supervisory Board has an advisory
and supervising role and focuses especially on: (I) achievement of the Company’s objectives,
(II) corporate strategy and risk inherent to the business activities, (III) the structure and
operation of the internal risk management and control systems, (IV) the financial reporting
process and (V) compliance with legislation and regulations.
The above subjects are frequently discussed between the Board of Management and the
Supervisory Board, in plenary meetings as well as by means of ongoing individual consultations.
In addition, the Supervisory Board is provided with reports on the (financial) developments in
ASML on a regular basis.
Furthermore, ASML’s corporate governance structure is intended to: (I) provide shareholders
with regular, reliable and relevant transparent information regarding ASML’s activities,
structure, financial situation, performance and other information; (II) apply high standards for
disclosure, accounting and audit; (III) apply stringent rules with regard to insider trading.
Also because of the requirements dictated by the Sarbanes-Oxley Act, ASML focuses on its
internal control systems. This subject is frequently discussed with ASML’s Audit Committee.
In addition, ASML’s CEO and CFO are required, based on the Sarbanes-Oxley Act, to sign
a certificate stating that the Company’s disclosure controls and procedures and controls
over financial reporting are adequate and effective for the Company. This certificate along
with ASML’s Form 20-F will be filed with the Securities and Exchange Commission (SEC) in
the U.S. ASML is currently also implementing further procedures and practices to ensure that
the financial reporting process is set up in such a manner that it can be audited, as required
per 2005, under section 404 of the Sarbanes-Oxley Act.
ASML’s Code on Ethical Business Conduct includes a so-called whistle blower procedure.
The Principles of Ethical Business Conduct are posted on ASML’s website (see Item 16.B.
on Form 20-F).
Principle: Amount and composition of the remuneration
ASML is of the opinion that it complies with the principle laid down in this paragraph on
remuneration. The remuneration of ASML’s Board of Management is based on various criteria,
goals and objectives and is benchmarked against the remuneration packages for board-level
executives of other multinational companies operating in global markets. For more details,
reference is made to the Remuneration paragraph in the Report of the Supervisory Board,
as well as the Remuneration Policy to be adopted in the General Meeting of Shareholders
on March 18, 2004.
Regarding some of the best practice provisions, it should be noted that ASML respects the
existing rights of the members of the Board of Management.
19ASML ANNUAL REPORT 2003
II.3 Conflicts of
Interest
III Supervisory
Board
Principle: Determination and disclosure of remuneration
The remuneration report as disclosed in the annual report on the financial year 2003 is in
compliance with relevant laws and regulations. However, it does not specifically address the
relevant recommendations of the Code, as these are not yet applicable over the financial year
2003. ASML expects to report on this subject in accordance with the Code as of the financial
year 2004 and beyond.
Principle: Avoidance of conflict of interest
This subject has been addressed to a certain extent in both ASML’s Articles of Association,
and ASML’s Code on Ethical Business Conduct. ASML’s Code on Ethical Business Conduct
will be reviewed to determine whether ASML deems it necessary to amend the current
arrangements, as recommended by the (Tabaksblat) Code.
Principle III.I Role and procedure
ASML’s Supervisory Board’s role, as well as the subjects to be discussed in the Supervisory
Board, is summarized above under II.1. We will review the best practice provisions related
to this subject more in-depth and if deemed desirable, shall implement these provisions.
However, also referring to the content of the Report on the Supervisory Board, we believe
20ASML ANNUAL REPORT 2003
that we comply with most of the recommendations related to the role of and the procedures
applicable to the Supervisory Board.
The Rules of Procedure of the Supervisory Board shall be reviewed and amended if necessary
and shall subsequently be published on ASML’s website.
Principle III.2 Independence
We are of the opinion that we currently comply with this requirement. However, in the future
we may encounter problems with some of the best practice provisions. The reason is that
knowledge of and experience in the semiconductor industry is very important for ASML’s
Supervisory Board to be able to perform their supervising function. Because this industry
has relatively few players, and ASML is a supplier to almost all non-Japanese semiconductor
manufacturers, ASML may want to nominate candidates for the Supervisory Board who do not
fully comply with the criteria as listed under III.2.2, especially III.2.2.c. In those circumstances,
ASML and the candidate will ensure that any such business relationship does not compromise
the candidate’s independence.
Principle III.3 Expertise and composition
Regarding the profile of the Supervisory Board as well as its rotation schedule,
the Supervisory Board is in the process of amending these documents, which will be available
21ASML ANNUAL REPORT 2003
IV. The
shareholders and
general meeting
of shareholders
on ASML’s website later this year. Regarding the other best practice provisions, ASML will
look into the best method of implementing these.
Principle III.4 Role of the chairman of the Supervisory Board and the
company secretary
ASML’s current practice is to a large extent in line with the content of this principle; this will
be formalized in the course of this year.
Principle III.5 Composition and role of the three key committees of the
Supervisory Board
The Supervisory Board currently has two committees: an Audit Committee and a
Remuneration Committee. Their roles and functions are described in the Supervisory Board’s
Rules of Procedure. For a summary of the role and function of those committees,
the execution of their tasks as well as an overview of their members, reference is made to
the Report of the Supervisory Board as well as Item 6.C. on Form 20-F. Regarding the
recommendation to establish a Selection and Appointment Committee: such a committee
exists on an ad-hoc basis, but ASML intends to formalize the institution of such a committee
and to amend the Supervisory Board’s Rules of Procedure accordingly in the course of 2004.
Principle III.6 Conflicts of interest
ASML agrees with the principle to avoid any conflicts of interest or any apparent conflicts of
interest between the Company and the Supervisory Board. However, ASML does not yet have
a formal procedure to deal with this subject. ASML shall formalize this matter in the course of
the year.
Principle III.7 Remuneration
The principle that the General Meeting of Shareholders determines the remuneration of
Supervisory Board members and that the remuneration is not dependent on the results of
the company is already current practice within ASML, including the requirement to report the
remuneration in accordance with current law. We shall further look into the best practice
provisions.
Principle III.8 One-tier management structure
This is not applicable for ASML, as ASML has a two-tier structure.
Principle IV.1 Powers
ASML complies with all legal requirements regarding the participation and the supply
of information to the shareholders, and endorses the principle of full participation by the
shareholders in the system of checks and balances in the Company. Furthermore, as soon
as legally and practically feasible, ASML intends to facilitate proxy voting. Several of the best
practice provisions are in the process of being implemented; the others will be looked into.
Principle IV.2 Depositary receipts for shares
This is not applicable, as ASML does not have depositary receipts for shares.
22ASML ANNUAL REPORT 2003
V. The audit of
the financial
reporting and the
position of the
internal auditor
function and the
external auditor
Principle IV.3 Provision of information to and logistics of the General
Meeting of Shareholders
ASML subscribes to this principle, and we shall look into the best practice provisions to
determine whether we need to make adjustments to our current procedures.
Principle IV.4 Responsibility of institutional investors
ASML endorses this principle, as ASML would like its institutional investors (as well as other
shareholders), to play a more active role in exercising their “shareholders’ rights.”
Principle V.1 Financial reporting
ASML has internal processes in place to ensure that all financial information to be disclosed
will be reported in a timely and complete manner. Specifically, ASML instituted a Disclosure
Committee to support and monitor such processes. The internal procedures are frequently
discussed within the Audit Committee of ASML’s Supervisory Board, including the role of the
external auditor in the publication of the financial reports.
Principle V.2 Role, appointment, remuneration and assessment of the
functioning of the external auditor
The General Meeting of Shareholders appointed ASML’s external auditor in 1995.
Up to January 2004, the Audit Committee of the Supervisory Board has approved the
remuneration of the external auditor as well as the non-audit services to be performed.
ASML shall in the course of this year determine whether we deem it desirable to change this
process.
Principle V.3 Internal auditor function
ASML does not have an internal auditor function; ASML feels that the internal risk and control
systems should be fully integrated in the business processes and that they should fall under
the responsibility of the responsible manager. In light of the requirements under section 404
of the Sarbanes-Oxley Act, ASML is in the process of implementing internal assessments of
internal controls, which are of an auditing nature. The Disclosure Committee also plays an
important role in this process. For more details on the role and the responsibilities of the
Disclosure Committee, reference is made to Form 20-F, item 6.
Principle V.4 Relationship and communication of the external auditor with
the organs of the Company
The external auditor issues a report to the Supervisory Board on the conclusions of the audit
of ASML’s financial statements. This report is issued at the same moment that the external
auditor issues its management letter to the Board of Management. Such reports cover the
topics as described in the best practice provisions. Furthermore, ASML will ensure that the
external auditor is invited to the Supervisory Board meeting in which the annual accounts are
being approved.
The Board of Management and the Supervisory Board
Veldhoven, January 30, 2004
23ASML ANNUAL REPORT 2003
24ASML ANNUAL REPORT 2003
Financial Calendar
March 18, 2004
General Meeting of Shareholders
at the Evoluon,
Noord Brabantlaan 1A in Eindhoven
The Netherlands
April 21, 2004
Announcement of first quarter results for 2004
July 21, 2004
Announcement of second quarter results for 2004
October 20, 2004
Announcement of third quarter results for 2004
January 20, 2005
Announcement of annual results for 2004
Fiscal Year
ASML’s fiscal year ends as of December 31, 2004.
Listing
The ordinary shares of the Company are listed on the official
market of the Euronext Amsterdam N.V. and on the Nasdaq
Stock Market® (NASDAQ) in the United States, both under
the symbol “ASML.”
Investor Relations
ASML Investor Relations will supply information or further
copies of this Annual Report. Copies of other publications
(i.e., quarterly earnings announcements) can also be
obtained free of charge at the offices of ASML. The Annual
Report and the quarterly earnings announcements are also
available on the ASML website (www.asml.com).
Information andInvestor Relations
25ASML ANNUAL REPORT 2003
ASML WorldwideContact Information
Corporate Headquarters
De Run 6501
5504 DR Veldhoven
The Netherlands
Mailing address
P.O. Box 324
5500 AH Veldhoven
The Netherlands
U.S. main offices
8555 South River Parkway
Tempe, AZ 85284
U.S.A.
77 Danbury Road
Wilton, CT 06897
U.S.A.
Asia main office
Suite 603, 6/F
One International Finance Center
1, Harbour View Street
Central, Hong Kong, SAR
Corporate Communications
phone: +31 40 268 4941
fax: +31 40 268 3655
e-mail: corpcom@asml.com
Investor Relations
phone: +31 40 268 3938
fax: +31 40 268 3655
e-mail: investor.relations@asml.com
For more information please visit our website
www.asml.com
ASML ANNUAL REPORT 2003
27
Form 20-F
ASML ANNUAL REPORT 2003
ASML ANNUAL REPORT 2003
Securities and Exchange Commission Washington, D.C. 20549
FORM 20-FANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934for the fiscal year ended December 31, 2003
Commission file number 025566
ASML HOLDING N.V.(Exact Name of Registrant as Specified in Its Charter)
THE NETHERLANDS(Jurisdiction of Incorporation or Organization)
DE RUN 65015504 DR VELDHOVENTHE NETHERLANDS
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None(Title of Class)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Ordinary Shares(nominal value Eur 0.02 per share)
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
482,513,502 Ordinary Shares (nominal value Eur 0.02 per share)
23,100 Priority Shares (nominal value Eur 0.02 per share)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.
Yes (x) No ( )
Indicate by check mark which financial statement item the registrant has elected to follow.Item 17 ( ) Item 18 (x)
Name and address of person authorized to receive notices and communications from the Securities and Exchange Commission:Richard A. Ely
Skadden, Arps, Slate, Meagher & Flom (UK) LLP40 Bank Street, Canary Wharf
London E14 5DS England
30ASML ANNUAL REPORT 2003
Contents
Part I
33 Item 1 Identity of Directors, Senior Management and Advisors
33 Item 2 Offer Statistics and Expected Timetable
33 Item 3 Key Information
A. Selected Financial Data
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
45 Item 4 Information on the Company
A. History and Development of the Company
B. Business Overview
C. Organizational Structure
D. Property, plants and equipment
56 Item 5 Operating and Financial Review and Prospects
A. Operating Results
B. Liquidity and Capital Resources
C. Research and Development, Patents and Licenses
D. Trend Information
E. Off-Balance Sheet Arrangements
F. Tabular Disclosure of Contractual Obligations
G. Safe Harbor
79 Item 6 Directors, Senior Management and Employees
A. Directors and Senior Management
B. Compensation
C. Board Practices
D. Employees
E. Share Ownership
87 Item 7 Major Shareholders and Related Party Transactions
A. Major Shareholders
B. Related Party Transactions
C. Interests of Experts & Counsel
90 Item 8 Financial Information
A. Consolidated Statements and Other Financial Information
B. Significant Changes
31ASML ANNUAL REPORT 2003
90 Item 9 The Offer and Listing
A. Listing Details
B. Plan of Distribution
C. Markets
D. Selling Shareholder
E. Dilution
F. Expenses of the Issue
92 Item 10 Additional Information
A. Share Capital
B. Memorandum and Articles of Association
C. Material Contracts
D. Exchange Controls
E. Taxation
F. Dividends and Paying Agents
G. Statement by Experts
H. Documents on Display
I. Subsidiary Information
102 Item 11 Quantitative and Qualitative Disclosures About Market Risk
104 Item 12 Description of Securities Other Than Equity Securities
Part II
105 Item 13 Defaults, Dividend Arrearages and Delinquencies
105 Item 14 Material Modifications to the Rights
of Security Holders and Use of Proceeds
105 Item 15 Controls and Procedures
105 Item 16
A. Audit Committee Financial Expert
B. Code of Ethics
C. Principal Accountant Fees and Services
Part III
108 Item 17 Financial Statements
108 Item 18 Financial Statements
108 Item 19 Exhibits
Special Note Regarding Forward-Looking Statements
In addition to historical information, this annual report on Form 20-F contains and incorporates
by reference statements relating to our future business and/or results. These statements
include certain projections and business trends that are “forward-looking” within the meaning
of the Private Securities Litigation Reform Act of 1995. You can generally identify these
statements by the use of words like “may”, “will”, “could”, “should”, “project”, “believe”,
“anticipate”, “expect”, “plan”, “estimate”, “forecast”, “potential”, “intend”, “continue” and
variations of these words or comparable words.
Forward-looking statements do not guarantee future performance and involve risks and
uncertainties. Actual results may differ materially from projected results as a result of certain
risks and uncertainties. These risks and uncertainties include, without limitation, those
described under Item 3.D. “Risk Factors” and those detailed from time to time in our other
filings with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC").
These forward-looking statements are made only as of the date of this annual report on Form
20-F. We do not undertake to update or revise the forward-looking statements, whether as a
result of new information, future events or otherwise.
Presentation of Financial and Operational Information
In May 2001, we consummated our merger with Silicon Valley Group, Inc. (“SVG”), now part of
ASML US, Inc. (“ASML US”). The merger is accounted for under the “pooling of interests”
method. Therefore, the consolidated financial statements of ASML Holding N.V. (“ASML” or
the “Company”) for the year ended December 31, 2001, the Selected Financial Information for
the years ended December 31, 2001, 2000 and 1999 and the financial and operational
information presented in this annual report on Form 20-F for the year ended December 31,
2001, reflect the combination of financial statements for ASML’s historical operations with
those of SVG.
Because SVG’s year-end prior to the merger differed from ASML’s year-end, in conformity
with accounting principles generally accepted in the United States ("U.S. GAAP") ASML’s
consolidated financial statements for fiscal years 2000 and 1999 contain the results of ASML’s
historical operations for the twelve months ended December 31, 2000 and December 31, 1999
and the results of SVG’s historical operations for the twelve months ended September 30,
2000 and September 30, 1999.
On December 18, 2002, we announced the proposed divestiture of our Thermal business,
including related customer support activities, and the termination of our activities in the Track
business. As a result of this decision, our consolidated financial statements for each of the
three years ended December 31, 2003, our Selected Financial Information for each of the five
years ended December 31, 2003 and the financial and operational information presented in
this annual report on Form 20-F have been adjusted to present these businesses as
discontinued operations, instead of as a separate segment as they had been reported prior to
the divestiture announcement. In October 2003, we substantially concluded the divestiture of
our Thermal business.
32ASML ANNUAL REPORT 2003
Item 1
Identity of
Directors, Senior
Management and
Advisors
Item 2
Offer Statistics
and Expected
Timetable
Item 3
Key Information
Not applicable
Not applicable
A. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with Item 5
“Operating and Financial Review and Prospects” and Item 18 “Financial Statements”.
33ASML ANNUAL REPORT 2003
34ASML ANNUAL REPORT 2003
Five-Year FinancialSummary1
Year ended December 31 1999 2000 2001 2002 2003
(in thousands, except per share data) EUR EUR EUR EUR EUR
Consolidated statements of operations data
Net sales 1,518,027 2,672,630 1,589,247 1,958,672 1,542,737
Cost of sales 1,028,221 1,571,816 1,558,234 1,491,068 1,173,955
Gross profit on sales 489,806 1,100,814 31,013 467,604 368,782
Research and development costs 234,378 327,015 347,333 324,419 305,839
Research and development credits (38,815) (24,983) (16,223) (26,015) (19,119)
Selling, general and administrative expenses 186,638 256,513 245,962 263,243 212,609
Restructuring and merger and acquisition costs (283) 0 44,559 0 24,485
Operating income (loss) 107,888 542,269 (590,618) (94,043) (155,032)
Minority interest in net result from subsidiaries 0 (3,205) 3,606 0 0
Interest income (expense), net 1,009 12,593 (7,207) (36,781) (29,149)
Income (loss) from continuing operations before income taxes 108,897 551,657 (594,219) (130,824) (184,181)
(Provision for) benefit from income taxes (34,526) (167,923) 179,017 42,779 59,675
Cumulative effect of accounting changes net of tax 0 (2,676) 0 0 0
Net income (loss) from continuing operations 74,371 381,058 (415,202) (88,045) (124,506)
Loss from discontinued operationsbefore income taxes (25,270) (3,685) (103,001) (183,624) (59,026)
Benefit from income taxes 8,087 674 39,211 63,846 23,316
Net loss from discontinued operations (17,183) (3,011) (63,790) (119,778) (35,710)
Net income (loss) 57,188 378,047 (478,992) (207,823) (160,216)
Basic net income (loss) from continuing operationsper ordinary share2 0.16 0.83 (0.89) (0.18) (0.26)
Basic net loss from discontinued operationsper ordinary share2 (0.04) (0.01) (0.14) (0.26) (0.07)
Basic net income (loss) per ordinary share2 0.12 0.82 (1.03) (0.44) (0.33)
Diluted net income (loss) per ordinary share2 0.12 0.78 (1.03) (0.44) (0.33)
Number of ordinary shares used in computingper share amounts (in thousands)
Basic 458,542 461,887 465,866 476,866 482,240
Diluted 462,682 483,127 465,8663 476,8663 482,2403
1 The selected consolidated data for all periods presented have been adjusted to reflect the effects of our decision in December 2002 to discontinue our Track and Thermal businesses.
2 All net income (loss) per ordinary share amounts have been retroactively adjusted to reflect the three-for-one stock split in April 2000, as well as the issuance of 47,139,000 shares in connection with the May 2001 merger with SVG, which was accounted for as a pooling of interests.
3 The calculation of the number of ordinary shares used in computing diluted net income per ordinary share in 2001, 2002 and 2003 does not assumeconversion of ASML’s outstanding Convertible Subordinated Notes and does not assume the effect of the exercise of options issued under ASML’s stockoption plans, as such conversions and exercises would have an anti-dilutive effect.
35ASML ANNUAL REPORT 2003
As of December 31 1999 2000 2001 2002 2003
(in thousands) EUR EUR EUR EUR EUR
Consolidated balance sheets data
Working capital4 1,550,886 2,145,378 1,822,711 1,662,570 1,463,308
Total assets 2,397,926 3,432,972 3,643,840 3,301,688 2,868,282
Long-term liabilities 823,281 871,742 1,588,846 1,233,398 1,040,556
Total shareholders’ equity 1,129,900 1,666,212 1,226,287 1,315,516 1,141,207
Consolidated statements of cash flows data
Purchases of property, plant and equipment (126,057) (181,007) (312,857) (138,587) (71,440)
Depreciation, amortization and impairment 77,773 111,133 138,959 186,686 156,900
Net cash provided by (used in) operating activities 28,198 250,744 (199,615) (54,151) 509,333
Net cash used in investing activities (150,269) (151,886) (326,095) (79,852) (25,702)
Net cash provided by (used in) financing activities 553,154 34,198 664,290 21,427 (68,156)
Net cash provided by (used in) discontinued operations (40,566) (45,048) (69,815) (127,473) 12,736
Net increase (decrease) in cash and cash equivalents 430,511 248,812 (73,522) (241,918) 359,046
Ratios and other data
Increase (decrease) in net sales from continuing operations (in percent) 36.7 76.1 (40.5) 23.2 (21.2)
Gross profit from continuing operations as a percentage of net sales 32.3 41.2 2.0 23.9 23.9
Operating income (loss) from continuing operations as a percentage of net sales 7.1 20.3 (37.2) (4.8) (10.0)
Net income (loss) from continuing operations as a percentage of net sales 4.9 14.3 (26.1) (4.5) (8.1)
Shareholders’ equity as a percentage of total assets 47.1 48.5 33.7 39.8 39.8
Backlog of new systems (in units) at year-endfor continuing operations 206 365 117 103 103
Backlog of used systems (in units) at year-end for continuing operations 0 0 1 7 21
Backlog of systems (in units) at year-end for continuing operations 206 365 118 110 124
Sales of systems (in units)from continuing operations 267 455 197 205 169
Number of employees at year-endfor continuing operations 4,889 6,628 6,039 5,971 5,059
Number of ordinary shares outstanding (in thousands) 460,412 463,395 466,978 482,182 482,514
Stock price ASML at year-end5 36.76 24.19 19.52 7.96 15.72
Volatility % ASML stock (260 days)6 99.7% 80.0% 71.0% 89.0% 60.9%
4 Working Capital is calculated as the difference between total current assets and total current liabilities.5 Closing price of ASML’s ordinary shares listed on the Official Segment of the stock market of Euronext Amsterdam N.V. (Source: Bloomberg)6 Volatility represents the variability in our share price on the Official Segment of the stock market of Euronext Amsterdam N.V. as measured
over the last 260 business days of each year presented. (Source: Bloomberg)
Exchange Rate Information
We publish our consolidated financial statements in euro. In this Annual Report,
references to “EUR” or “euro” are to euro, and references to “$”, “dollars”, “U.S. dollars”
or “USD” are to United States dollars. Solely for the convenience of the reader, certain euro
amounts presented as of and for the year ended December 31, 2003 have been translated
into United States dollars using the exchange rate in effect on December 31, 2003 of
USD 1.00 = EUR 0.7918. These translations should not be construed as representations
that the euro amounts could be converted into U.S. dollars at that rate.
Historically, a portion of our revenues and expenses has been denominated in currencies
other than the euro. For a discussion of the impact of exchange rate fluctuations on our
financial condition and results of operations, see Item 5.A. Operating results “Foreign
Exchange Management” and Note 1 to our consolidated financial statements.
The following are the Noon Buying Rates certified by the Federal Reserve Bank of New York
for customs purposes (the “Noon Buying Rate”) expressed in euro per U.S. dollar.
Calendar Period Period End Average1 High Low
1999 0.99 0.94 1.00 0.85
2000 1.07 1.09 1.21 0.97
2001 1.12 1.12 1.19 1.05
2002 0.95 1.05 1.16 0.95
2003 0.79 0.88 0.97 0.79
2004 (through January 29) 0.81 0.79 0.81 0.78
(Source: Bloomberg)
1 The average of the Noon Buying Rates on the last business day of each month during the relevant period.
Monthly high and low euros per U.S. dollar exchange rates High Low
July 2003 0.90 0.86
August 2003 0.92 0.88
September 2003 0.92 0.86
October 2003 0.86 0.85
November 2003 0.88 0.84
December 2003 0.84 0.79
January 2004 (through January 29) 0.81 0.78
(Source: Bloomberg)
B. Capitalization and Indebtedness
Not applicable
C. Reasons for the Offer and Use of Proceeds
Not applicable
36ASML ANNUAL REPORT 2003
Risks Related to
the Semiconductor
Industry
D. Risk Factors
In conducting our business, we face many risks that may interfere with our business
objectives. Some of these risks relate to our operational processes, while others relate to our
business environment. It is important to understand the nature of these risks and the impact
they may have on our business, financial condition and results of operations. Some of the
more relevant risks are described below.
The Semiconductor Industry Has Been Experiencing a Period
of Contraction, the Length and Extent of Which Cannot Be
Forecast
The year 2003 was an unprecedented third consecutive year of contraction in the global
semiconductor industry. Adverse conditions in the semiconductor market have caused
a number of semiconductor manufacturers to reduce their capital expenditures or delay
expansion or construction of manufacturing facilities. This has resulted in decreased demand
for our products, unanticipated rescheduling of ordered products and cancellation of
previously placed orders. The performance of the semiconductor market remains difficult to
predict. Continued difficult market conditions would likely have a material adverse effect on
our business, financial condition and results of operations.
The Semiconductor Industry Is Highly Cyclical and We May Be
Adversely Affected by Any Future Downturns
We expect that the semiconductor industry will experience future downturns. We cannot
predict the timing, duration or severity of any future downturn or the corresponding adverse
effect on our business, financial condition and results of operations. Our ability to maintain
profitability through any future downturns will depend substantially on whether we are
successful in our current efforts to lower our costs and break-even level, which is the number
of lithography systems we must sell in a year to achieve positive net income.
Sales of our photolithography systems depend in large part upon the level of capital
expenditures by semiconductor manufacturers. These capital expenditures depend upon
a range of competitive and market factors, including:
• the current and anticipated market demand for semiconductors and for products utilizing
semiconductors;
• semiconductor prices;
• semiconductor production costs; and
• general economic conditions.
Historically, the semiconductor market has been highly cyclical and has experienced recurring
periods of oversupply, resulting in significantly reduced demand for capital equipment,
including advanced photolithography projection systems such as the wafer steppers and
Step & Scan systems we produce. Despite this cyclicality, we intend to maintain significant
levels of research and development expenditures in order to maintain our competitive position.
37ASML ANNUAL REPORT 2003
Our Business Will Suffer If We Do Not Respond Rapidly to the
Commercial and Technological Changes in the Semiconductor
Industry
The semiconductor manufacturing industry is subject to:
• rapid technological change;
• frequent new product introductions and enhancements;
• evolving industry standards;
• changes in customer requirements; and
• continued shortening of product life cycles.
Our products could become obsolete sooner than anticipated because of a faster than
anticipated change in one or more of the technologies related to our products or in market
demand for products based on a particular technology. Our success in developing new
products and in enhancing our existing products depends on a variety of factors, including the
successful management of our research and development programs and timely completion of
product development and design relative to competitors. If we do not develop and introduce
new and enhanced systems at competitive prices on a timely basis, our customers will not
integrate our systems into the planning and design of new fabrication facilities and upgrades
of existing facilities, which would have an adverse impact on our business, financial condition
and results of operations.
We Face Intense Competition
The semiconductor equipment industry is highly competitive. The principal elements of
competition in our markets are the technical performance characteristics of a photolithography
system and the value of ownership of that system based on its purchase price, maintenance
costs, productivity and customer service and support. In addition, we believe that an
increasingly important factor affecting our ability to compete is the strength and breadth
of our portfolio of patents and other intellectual property rights relative to those of our
competitors. This is due, in part, to the significant decline in the overall size of the market for
photolithography systems that has occurred since the beginning of 2001. We believe this
decline has resulted in increased competition for market share through the aggressive
prosecution of patents to prevent competitors from using and developing their technology.
Our competitiveness will increasingly depend upon our ability to protect and defend our
patents, as well as our ability to develop new and enhanced semiconductor equipment that
is competitively priced and introduced on a timely basis. See Item 4.B. “Business Overview,
Intellectual Property” and Note 14 to our consolidated financial statements.
The cost to develop new systems, in particular photolithography systems, is extremely high,
and accordingly, the photolithography equipment industry is characterized by the dominance
of a few suppliers. ASML’s primary competitors are Nikon Corporation (“Nikon”) and Canon
Kabushika Kaisha (“Canon”). Nikon and Canon are the dominant suppliers in the Japanese
market, which accounts for a significant portion of worldwide semiconductor production.
This market historically has been difficult for non-Japanese companies to penetrate,
and ASML has sold only a limited number of systems to Japanese customers.
38ASML ANNUAL REPORT 2003
Risks Related to
ASML
Both Nikon and Canon have substantial financial resources and broad patent portfolios.
Each has stated that it will introduce new products with improved price and performance
characteristics that will compete directly with our products, which may cause a decline in
our sales or loss of market acceptance for our photolithography systems. In addition, adverse
market conditions, industry overcapacity or a decrease in the value of the Japanese yen in
relation to the euro or the U.S. dollar could lead to intensified price-based competition in
those markets that account for the majority of our sales, resulting in lower prices and margins
and an adverse impact on our business, financial condition and results of operations.
The Number of Systems We Can Produce is Limited by Our
Dependence on a Limited Number of Suppliers of Key
Components
We rely on outside vendors for the components and subassemblies used in our systems,
each of which is obtained from a single supplier or a limited number of suppliers. Our reliance
on a limited group of suppliers involves several risks, including a potential inability to obtain
an adequate supply of required components and the risk of untimely delivery of these
components and subassemblies.
The number of photolithography systems we have been able to produce has occasionally been
limited by the production capacity of Carl Zeiss SMT AG ("Zeiss"). Zeiss is our sole supplier
of lenses and other critical optical components. The inability of Zeiss to maintain and increase
production levels or our inability to maintain our business relationship with Zeiss in the future
could result in our inability to fulfill orders, which could damage relationships with current and
prospective customers and have an adverse effect on our business, financial condition and
results of operations. If Zeiss were to terminate its relationship with us or if Zeiss were unable
to maintain production of lenses over a prolonged period, we would effectively cease to be
able to conduct much of our business. See further Item 4.B. “Business Overview,
Manufacturing, Logistics and Suppliers.”
In addition to Zeiss’ current position as our sole supplier of lenses, the excimer laser
illumination systems that provide the ultraviolet light source, referred to as “deep UV”,
used in our high resolution steppers and Step & Scan systems, are available from only
a limited number of suppliers.
Although the timeliness, yield and quality of deliveries to date from our remaining
subcontractors generally have been satisfactory, manufacturing certain of these components
and subassemblies is an extremely complex process and delays caused by suppliers may
occur in the future. A prolonged inability to obtain adequate deliveries, or any other
circumstance that requires us to seek alternative sources of supply, could significantly hinder
our ability to ship our products in a timely fashion, which could damage relationships with
current and prospective customers and have a material adverse effect on our business,
financial condition and results of operations.
A High Percentage of Net Sales is Derived from a Few
Customers
Historically, we have sold a substantial number of lithographic systems to a limited number of
customers. While the identity of our largest customers may vary from year to year, we expect
39ASML ANNUAL REPORT 2003
sales to remain concentrated among relatively few customers in any particular year and
foresee further concentration of customers in future periods. The loss of any significant
customer or any reduction in orders by a significant customer may have an adverse effect
on our business, financial condition and results of operations.
In 2003, sales to one customer accounted for EUR 314 million, or 20 percent of net sales,
compared to EUR 377 million, or 19 percent of net sales, in 2002. As a result of the limited
number of customers, credit risk on our receivables is concentrated. Our three largest
customers accounted for 44 percent of accounts receivable at December 31, 2003, compared
to 42 percent at December 31, 2002. Business failure of one of our main customers may result
in adverse effects on our business, financial condition and results of operations.
The Pace of Introduction of Our New Products is Accelerating
and is Accompanied by Potential Design and Production Delays
and by Significant Costs
The development and initial production, installation and enhancement of the systems we
produce, is often accompanied by design and production delays and related costs of a nature
typically associated with the introduction and transition to full-scale manufacture of complex
capital equipment. While we expect and plan for a corresponding learning curve effect in our
product development cycle, we cannot precisely predict the time and expense required to
overcome these initial problems and to ensure full performance to specifications. There is
a risk that we may not be able to introduce or bring to full-scale production new products as
quickly as we might have expected in our product introduction plans. This may result in
adverse effects on our business, financial condition and results of operations.
We Derive Most of Our Revenues from the Sale of a Relatively
Small Number of Products
We derive most of our revenues from the sale of a relatively small number of lithographic
equipment systems (169 units in 2003 and 205 units in 2002), with an average selling price in
2003 of EUR 7.6 million (EUR 9.5 million for new systems and EUR 2.0 million for used
systems). As a result, the timing of recognition of revenue from a small number of transactions
may have a significant impact on our net sales and other operating results for a particular
reporting period. Specifically, the failure to receive anticipated orders, or delays in shipments
near the end of a particular reporting period, due, for example, to:
• unanticipated shipment rescheduling;
• cancellation by customers;
• unexpected manufacturing difficulties; and
• delays in deliveries by suppliers,
may cause net sales in a particular reporting period to fall significantly below our expectations,
which would, in turn, adversely affect our operating results for that period.
Quarterly Reporting May Increase the Volatility of Our
Earnings Figures
Since the first quarter of 2003, we have published financial results on a quarterly basis. As a
result of our dependence on the sale of a relatively small number of products, described in
the preceding risk factor, our quarterly earnings announcements may increase the apparent
volatility of our earnings figures as compared to our historical practice of semi-annual earnings
announcements.
40ASML ANNUAL REPORT 2003
Reporting in accordance with International Financial Reporting
Standards May Differ from Reporting in accordance with
U.S. GAAP
Beginning in 2005, the European Commission will require companies that are quoted on a
European stock market, such as Euronext Amsterdam N.V. ("Euronext Amsterdam"), to publish
their financial statements in accordance with International Financial Reporting Standards ("IFRS").
While we intend to continue publishing U.S. GAAP financial statements, we also will publish
our consolidated financial statements in accordance with IFRS from January 1, 2005 onwards.
Our financial condition and results of operations reported in accordance with IFRS may differ
from our financial condition and results of operations reported in accordance with U.S. GAAP,
which could adversely affect the market price of our ordinary shares.
See Item 5.A. “Operating Results, Principal Differences Between IFRS and U.S. GAAP.”
Failure to Adequately Protect the Intellectual Property Rights
upon Which We Depend Could Harm Our Business
We rely on patents, copyrights, trade secrets and other measures to protect our proprietary
technology. However, there is no assurance that such measures will be adequate. We face risks that:
• competitors may be able to develop similar technology independently;
• our pending patent applications may not be issued as expected;
• the steps we take to prevent misappropriation or infringement of our intellectual property
may not be successful; and
• intellectual property laws may not sufficiently protect our proprietary rights or may adversely
change in the future.
In addition, litigation may be necessary in order to enforce our intellectual property rights, to
determine the validity and scope of the proprietary rights of others or to defend against claims
of infringement. Any such litigation may result in substantial costs and diversion of resources,
and, if decided unfavorably to us, could have a material adverse effect on our business,
financial condition and results of operations. We also may incur substantial acquisition or
settlement costs where doing so would strengthen or expand our intellectual property rights
or limit our exposure to intellectual property claims of third parties.
Defending Against Intellectual Property Claims by Others Could
Harm Our Business
In the course of our business, we are subject to claims by third parties alleging that our
products or processes infringe upon their intellectual property rights. In addition, some of
our customers have received notices of infringement from third parties, alleging that our
equipment used by such customers in the manufacture of semiconductor products and/or
the methods relating to the use of our equipment infringe one or more patents issued to such
parties. We have been advised that, if such claims were successful, we could be required to
indemnify customers for some or all of any losses incurred or damages assessed against them
as a result of such infringement. We may also incur substantial licensing or settlement costs
where doing so would strengthen or expand our intellectual property rights or limit our
exposure to intellectual property claims by others.
41ASML ANNUAL REPORT 2003
As more fully described in Item 4.B. “Business Overview, Intellectual Property” and Note
14 to our consolidated financial statements, we are currently party to a series of litigation
and administrative proceedings in the United States, Japan and Korea in which Nikon alleges
our infringement of Nikon patents relating to photolithography. A final non-appealable adverse
decision in any of these proceedings could substantially restrict or prohibit our ability to
conduct sales in or from the United States, Korea or Japan, which, in turn, could have
a material adverse effect on our financial condition or results of operations.
We believe that the Nikon litigation is an example of a growing trend in the lithography
industry of competing for market share by means of aggressive prosecution of intellectual
property rights with the purpose of preventing or limiting a competitor’s ability to utilize and
develop technology. While we believe we have sufficient intellectual property rights to
successfully conduct our business, there is a continuing risk that we will be subject to claims
alleging the infringement of others’ patents or intellectual property rights. If successful,
these claims could limit or prohibit us from developing our technology and producing our
products, which would have a material adverse effect on our business, financial condition
and results of operations. In addition, we anticipate that the costs associated with the
maintenance, protection, through litigation or otherwise, and expansion of our intellectual
property portfolio in coming years will increase significantly. Furthermore, we rely on a number
of patents owned by Royal Philips Electronics, our former parent company. While Philips has
granted us, without charge, a worldwide, irrevocable, non-exclusive license under those patents,
they remain subject to the same risks regarding validity, scope and enforceability that relate to
our patents. Philips has no obligation to us to defend or enforce its patents against third parties.
We Are Subject to Risks in our International Operations
The majority of our business activity is conducted outside Europe, including in developing
and emerging markets in Asia. There are a number of risks inherent in doing business in those
markets, including the following:
• potentially adverse tax consequences;
• unfavorable political or economic factors; and
• unexpected legal or regulatory changes.
Our inability to manage successfully the risks inherent in our international activities could
adversely affect our business, financial condition and results of operations.
Disruption in Taiwan’s Political Environment Could Seriously
Harm Our Business and the Market Price of Our Shares
Approximately 12% of our 2003 revenues and approximately 27% of our 2002 revenues
were derived from customers in Taiwan. Taiwan has a unique international political status.
The People’s Republic of China asserts sovereignty over Taiwan and does not recognize the
legitimacy of the Taiwan government. Relations between Taiwan and the People’s Republic
of China, changes in Taiwanese government policies and other factors affecting Taiwan’s
political, economic or social environment could affect our business, financial condition and
results of operation.
42ASML ANNUAL REPORT 2003
We Are Subject to Environmental Laws and Regulations
We are subject to certain Dutch and foreign environmental regulations in areas such
as energy resource management, reduction of hazardous substances, recycling, clean air,
water protection and waste disposal. We believe that we have taken adequate precautions to
comply with these regulations in the course of our ordinary business operations. Furthermore,
we do not believe that any environmental laws or regulations currently in effect will have an
adverse effect on our business, financial condition and results of operations. However,
we cannot predict whether any pending or future legislation will be adopted or what the effect
of such legislation would be on our business, financial condition and results of operations.
We Are Dependent on the Continued Operation of a Limited
Number of Manufacturing Facilities
All of our manufacturing activities, including subassembly, final assembly and system testing,
take place in one clean room facility located in Veldhoven, the Netherlands, and one clean
room facility in Wilton Connecticut, U.S. These facilities are subject to disruption for a variety
of reasons, including work stoppages, fire, energy shortages, flooding or other natural
disasters. As from 2003 onwards, we are assembling a portion of our components and
subassemblies at our facilities in Wilton, which were previously outsourced to an outside
vendor. We cannot ensure that alternate production capacity would be available if a major
disruption were to occur or that, if it were available, it could be obtained on favorable terms.
Such a disruption could have an adverse effect on our business, financial condition and
results of operations.
Because of Labor Laws and Practices, any Workforce
Reductions That We May Wish to Implement In Order To
Reduce Costs Company-Wide May Be Delayed or Suspended.
The semiconductor market is highly cyclical and as a consequence we may need to implement
workforce reductions in case of a downturn, in order to adjust to such market changes.
In accordance with labor laws and practices applicable in the jurisdictions in which we
operate, a reduction of any significance may be subject to certain formal procedures,
which can delay, or may result in the modification of our decison. For example in the
Netherlands if our Works Council does not agree with a proposed workforce reduction in the
Netherlands, but we nonetheless determine to proceed, we must temporarily suspend any
action while the Works Council determines whether to appeal to the Dutch Courts. This appeal
process can cause a delay of several months and may require us to address any procedural
inadequacies identified by the Court in the way we reached our decision. Such delays,
could impair our ability to reduce costs company-wide to levels comparable to those of
our peers. See Item 6.D. “Employees.”
We May Have Significant Exposure to Fluctuations in Foreign
Exchange Rates, Which Could Harm Our Results of Operations
We incur the majority of our manufacturing costs and price our systems predominantly in euro.
Accordingly, fluctuations of the euro versus the Japanese yen and the U.S. Dollar may affect
our results of operations. However, a portion of our revenues is denominated in currencies
other than the euro. Therefore, a strengthening of the euro relative to such other currencies
in which we receive revenues could adversely impact our results of operations.
43ASML ANNUAL REPORT 2003
Risks Related to
Our Ordinary
Shares
The euro is the reporting currency we use in our consolidated financial statements.
A substantial portion of our assets, liabilities and operating results are denominated in U.S.
dollars, and a minor portion of our assets, liabilities and operating results are denominated in
currencies other than the euro and the U.S. dollar. Consequently, fluctuations in the exchange
rate of the U.S. dollar and other currencies against the euro can affect our financial results.
See Item 5.A. “Operating Results, Foreign Exchange Management”, Item 11 “Quantitative
and Qualitative Disclosures About Market Risk” and Note 4 to our consolidated financial
statements.
Our Ability to Realize Our Deferred Tax Assets is Uncertain
We currently have significant deferred tax assets, which resulted primarily from operating
losses incurred in prior years as well as other temporary differences. The operating losses
have predominantly been incurred in the United States and The Netherlands. SFAS (“Statement
of Financial Accounting Standard”) No. 109, “Accounting for Income Taxes,” requires the
establishment of a valuation allowance to reflect the likelihood of the realization of deferred
tax assets. Based on available evidence, we regularly evaluate whether it is more likely than
not that the deferred tax assets will be realized. This evaluation includes our judgment on the
future profitability and our ability to generate taxable income, changes in market conditions
and other factors. At December 31, 2003, we believe that there is sufficient evidence to
substantiate recognition of our net deferred tax assets with respect to net operating loss carry
forwards in the jurisdictions concerned. Future changes in facts and circumstances, if any,
may result in a need for a valuation allowance to these deferred tax asset balances which may
have an adverse effect on our business, financial condition and results of operations. See
Note 16 to our consolidated financial statements.
The Price of Our Ordinary Shares is Very Volatile
The current market price of our ordinary shares may not be indicative of prices that will prevail
in the trading market in the future. In particular, since our initial public offering, the market
price of our ordinary shares has experienced significant fluctuation, including fluctuation that
is unrelated to our performance. We expect that this fluctuation will continue in the future.
Restrictions on Shareholder Rights May Dilute Voting Power
Our Articles of Association reflect that we are subject to the provisions of Netherlands law
applicable to large corporations, called “structuurregime”. These provisions have the effect of
concentrating control over significant corporate decisions and transactions in the hands of our
Supervisory Board, which has the power to appoint its own members. In addition, the
provisions in our Articles of Association relating to our Priority Shares have the effect of taking
control over certain significant corporate decisions away from holders of ordinary shares. As a
result, holders of ordinary shares may have more difficulty in protecting their interests in the
face of actions by members of the Board of Management or members of our Supervisory
Board than if we were incorporated in the United States.
We also have a class of protective cumulative preference shares (the “Preference Shares”)
and have granted to Stichting Preferente Aandelen ASML, a Netherlands foundation, an option
to acquire from us, at their nominal value of EUR 0.02 per share, a number of preference
shares equal to the number of ordinary shares outstanding at the time of option exercise.
44ASML ANNUAL REPORT 2003
Item 4
Information on
the Company
This effectively would dilute by one-half the voting power of the outstanding ordinary shares.
The potential issuance of preference shares may discourage or significantly impede a third
party from acquiring a majority of our voting shares.
See further Item 10.B. “Memorandum and Articles of Association”.
A. History and Development of the Company
We commenced business operations in 1984. ASM Lithography Holding N.V. was incorporated
in the Netherlands on October 3, 1994 to serve as the holding company for our worldwide
operations, which include operating subsidiaries in the Netherlands, the United States,
Taiwan, Italy, France, Germany, the United Kingdom, Ireland, the Republic of Korea,
Singapore, Israel, China, Japan and Malaysia. In 2001, we changed our name from ASM
Lithography Holding N.V. to ASML Holding N.V. Our registered office is located at
De Run 6501, 5504 DR Veldhoven, the Netherlands.
In May 2001, we merged with SVG (now part of ASML US), a company that was active in the
Lithography, Track and Thermal businesses. The merger is accounted for under the “pooling
of interests” method.
In December 2002, we announced measures to contain costs, including the proposed
divestiture of our Thermal business, and related customer support activities, and the
termination of our activities in the Track business, except for certain ongoing customer
support obligations. In June 2003, we sold certain of our fixed assets and inventories related
to our Track business. In October 2003, we substantially completed the divestiture of our
Thermal business. In July 2003, we announced further workforce reductions to further
reduce costs company-wide.
Capital Expenditures
Our principal capital expenditures within continued operations over the past three years,
principally relating to machinery and equipment, amounted to EUR 74.5 million for 2003,
EUR 138.6 million for 2002 and EUR 313.4 million for 2001. Divestitures within continued
operations, also principally comprising machinery and equipment, amounted to
EUR 48.8 million for 2003, EUR 58.7 million for 2002 and EUR 21.7 million for 2001.
See Notes 8 and 9 to our consolidated financial statements.
Our current capital expenditures consist of machinery and equipment (e.g. prototypes,
demonstration systems and training models), information technology investments and
leasehold improvements to our facilities. Our Veldhoven headquarters is financed through a
special purpose vehicle that is a variable interest entity. See Item 5.E. “Off-Balance Sheet
Arrangements” and Note 12 to our consolidated financial statements. All other current capital
expenditures are financed internally.
B. Business Overview
We are one of the world’s leading providers of advanced technology systems for the
semiconductor industry, based on market share. We offer an integrated portfolio of lithography
45ASML ANNUAL REPORT 2003
systems mainly for manufacturing complex integrated circuits (“semiconductors” or “ICs”).
We supply systems to integrated circuit manufacturers throughout the United States,
Asia and Europe and also provide our customers with a full range of support from advanced
process and product applications knowledge to complete round-the-clock service support.
Value of Ownership
Our business model is based on our Value of Ownership concept that consists of the
following:
• offering ongoing improvements in productivity and value by introducing advanced
technology based on modular platforms;
• providing customer services that ensure rapid, efficient installation and superior on-site
support and training to optimize manufacturing processes and improve productivity;
• maintaining appropriate levels of research and development to offer the most advanced
technology suitable for high-throughput, low-cost volume production at the earliest possible
date;
• enhancing the capabilities of the installed base through ongoing field upgrades based on
new technology developments;
• reducing the cycle time between customer order of a system and the use of that system
in volume production on-site; and
• expanding operational flexibility in research and manufacturing by reinforcing strategic
alliances with world-class partners.
Market and Technology Overview
The worldwide electronics and computer industries have experienced dramatic growth since
the commercialization of ICs in the 1960s, largely due to the continual reduction in the cost
per function performed by ICs. Improvement in the design and manufacture of ICs with higher
circuit or “packing” densities has resulted in smaller, lower cost ICs capable of performing a
greater number of functions at higher speeds and with lower power consumption. We believe
that these long-term trends will continue for the foreseeable future and will be accompanied
by a continuing demand, subject to ongoing cyclical variations, for production equipment that
can accurately produce advanced ICs in high volumes at the lowest possible cost.
Photolithography is used to imprint complex circuit patterns onto the wafers that are the
primary raw material for ICs and is one of the most critical and expensive steps in their
fabrication. It is therefore a significant focus of the IC industry’s demand for cost-efficient
enhancements to production technology.
We primarily design, manufacture, market and service semiconductor processing equipment
used in the fabrication of integrated circuits. Our photolithography equipment includes
Step & Scan systems, which combine stepper technology with a photoscanning method.
Our product platform, TWINSCAN, was introduced in July 2000 and leverages the production-
proven elements from our PAS 5500 product family to address the industry shift toward larger
(300 mm) wafers. The TWINSCAN platform has become in 2003 the vehicle to introduce
improved resolution products both for 300 mm and 200 mm wafer size factories.
To enhance the flexibility towards 200 mm factory requirements, we are developing the XT
version of the TWINSCAN platform, both for 200 mm and 300 mm. The first shipment is
46ASML ANNUAL REPORT 2003
expected to be in the first half of 2004 with the XT:1250 products. Our PAS 5500 product
family, which supports a maximum wafer size of 200 mm in diameter, comprises advanced
wafer steppers and Step & Scan systems suitable for i-line and deep UV (including
248 nanometer and 193 nanometer wavelengths) processing of wafers.
We are currently performing research & development on immersion lithography, which is one
of the possible solutions to lower the cost per wafer and increase resolution. The first proof
of feasibility on a Step & Scan system was completed in the second half of 2003. The next
step is the development of early production tools that will allow our customers to verify the
immersion process qualification under specific process conditions. This verification phase will
probably take several quarters. We do not expect volume shipments of immersion lithography
systems before 2005.
We are also currently performing research & development on maskless lithography.
Maskless lithography is one of the possible solutions to manage escalating mask cost,
which is becoming a dominant factor in bringing new semiconductor designs to market for
advanced technology nodes. Designs resulting in small quantities of wafers produced, designs
with many changes or designs that require a fast time-to-market will particularly benefit from
this technology. In July 2003, Micronic Laser Systems AB (“Micronic”) and ASML announced
the signing of a memorandum of understanding to form a joint-venture company that will
focus on the optical maskless lithography market for semiconductor manufacturing.
We expect to conclude a joint-venture agreement with Micronic in the first half of 2004.
Products
Our product development strategy focuses on the development of product families based
on a modular, upgradeable design. Our PAS 5500 product family comprises advanced wafer
steppers and Step & Scan systems suitable for i-line and deep UV processing of wafers up
to 200mm in diameter. In mid-1997, we introduced the PAS 5500 Step & Scan systems with
improved resolution and overlay. Since then, we have further developed and expanded this
Step & Scan family. This modular upgradeable design philosophy has been further refined
and applied in the design of our most advanced product family, the TWINSCAN platform,
which is the basis for our current and next generation Step & Scan systems, producing wafers
up to 300 mm in diameter and capable of extending shrink technology beyond 70 nanometers.
Our older PAS 2500 and PAS 5000 families are suitable for g-line and i-line processing of
wafers up to 150 mm in diameter and are employed in manufacturing environments and in
special applications for which design resolutions no more precise than 0.5 microns are required.
In November 2002, ASML introduced the TWINSCAN AT:1200B, a high numerical aperture
(0.85) dual stage ArF (193 nanometer) lithography system for 300 millimeter as well as
200 millimeter wafer processing. It is the industry’s first high productivity tool for volume
applications at 80 nanometer linewidth.
In February 2003, we announced productivity performance enhancements for our TWINSCAN
family of lithography systems. Called TWINSCAN C, the new enhancements increase
throughput by approximately 15 percent, depending on product model. The productivity
47ASML ANNUAL REPORT 2003
enhancements in TWINSCAN C increase wafer output to over 110 wafers per hour for 300 mm
wafers at real production conditions (109 exposures per wafer). The increased stage speeds in
the TWINSCAN platform allow for these productivity improvements while maintaining imaging,
alignment and leveling accuracy.
In April 2003, we announced the delivery of the industry’s first full-field 157 nanometer
Step & Scan tool to the independent research and development chip consortium IMEC.
Called the Micrascan VII, the new system is the first 157 nanometer full-field tool able to
create working chips. 157 nanometer technology is an extension of optical lithography that
offers smaller feature sizes for more sophisticated chips.
In October 2003, we introduced the TWINSCAN XT:1250, a high numerical aperture (0.85)
dual stage ArF (193 nanometer) lithography system for 300 millimeter as well as 200 millimeter
wafer processing that extends imaging to the 65 nanometer node. The TWINSCAN XT:1250
allows productivity improvements in comparison with previous product models.
In December 2003, we received the industry’s first order for an immersion lithography system.
The new tool – ASML’s TWINSCAN XT:1250i – is a high productivity scanner for production
applications. Delivery of the first tool is scheduled for the third quarter of 2004. We have a
unique competitive advantage in immersion techniques due, in part, to the dual-stage design
of our TWINSCAN system. Wafer measurement – including focus and overlay – is completed
on the dry stage while the imaging process, using immersion fluid applied between the wafer
and the lens is completed on the other, wet stage. The dual-stage advantage of TWINSCAN
systems enables our customers to gain the process enhancements of immersion and to
continue with familiar and proven metrology technology.
We also continually develop and sell a range of product options and enhancements designed
to increase productivity and to optimize value of ownership over the entire life of our systems.
48ASML ANNUAL REPORT 2003
Sales and Customer Support
We market and sell our products in the United States and Europe principally through our
direct sales staff. In Asia, we sell our products primarily through our own direct sales staff,
supported by independent sales agents.
We support our customers with applications, service and technical support. Our field
engineers and applications, service and technical support specialists are based throughout
the United States, Europe and Asia.
Historically, the semiconductor market has been highly cyclical and has experienced recurring
periods of oversupply, resulting in significantly reduced demand for capital equipment,
including advanced photolithography projection systems such as the wafer steppers and
Step & Scan systems we produce. The year 2003 was an unprecedented third consecutive
year of contraction in the global semiconductor industry.
49ASML ANNUAL REPORT 2003
Current ASML Lithography product portfolio of Steppers and Step & Scan Systems
Feature Size Wavelength of Light
Feature size = Wavelength = length of light going through projection lens;
Resolution = The shorter the wavelength, the smaller the line width
Size of line and the finer the pattern on the IC
width in Nanometer
365 nm (i-line) 248 nm (KrF) 193 nm (ArF) 157 nm (F2)
700 PAS 5500/22
350 PAS 5500/125
300 PAS 5500/250
280 PAS 5500/400
and AT:400
150 PAS 5500/350
130 PAS 5500/750 and AT:750
120 PAS 5500/800
110 PAS 5500/850 and AT:850
100 PAS 5500/1100 and AT:1100 MSVII
90 PAS 5500/1150 and AT:1150
80 AT:1200
70 XT:1250 and XT:1250i
Notes: 1000 nanometer = 1 micron (µ) = 0.001mm = one millionth of a meterPAS 5500/22/125/250/350 = Stepper system with wafer size of 200mmPAS 5500/400 and up = Step & Scan system with wafer size of 200mmAT and XT = TWINSCAN system with wafer size of 200 and 300mmThis table does not include products sold on the PAS 2500 and PAS 5000 platforms.
During 2003, we sharpened our customer focus through the work of multiple cross-functional
process improvement teams. These process improvement teams are striving to streamline and
integrate main business processes such as new product introduction, acquisition of orders
from customers, fulfillment of orders, and our post-delivery support and services.
Customers and Geographic Markets
In 2003, we shipped 169 systems (in our continuing operations) to a limited number of
customers. We expect that sales to relatively few customers will continue to account for
a high percentage of our net sales in any particular year for the foreseeable future. We make
all our sales into the United States through our U.S. subsidiary and our system sales into Asia
through our Hong Kong subsidiary. See Note 17 to our consolidated financial statements for
a breakdown of our sales by geographic segment.
Manufacturing, Logistics and Suppliers
Our business model is based on outsourcing a significant part of the components and
modules that comprise our lithography systems, working in partnership with suppliers from all
over the world. Our manufacturing activities comprise the assembly and testing of a finished
system from components and subassemblies that are manufactured to our specifications by
third parties and by ourselves and the testing of those components, subassemblies and
finished systems. All of our manufacturing activities (subassembly, final assembly and system
testing) are performed in one clean room facility located in Veldhoven, the Netherlands, and
one clean room facility in Wilton, Connecticut, U.S. We procure stepper and Step & Scan
system components and subassemblies from a single supplier or a limited group of suppliers
in order to ensure overall quality and timeliness of delivery. We jointly operate a formal
strategy with suppliers known as Value Sourcing that is based on competitive performance in
quality, logistics, technology and total cost. The essence of Value Sourcing is to maintain a
supply base that is world class, globally competitive and globally present.
Our Value Sourcing strategy is based on the following strategic principles:
• maintaining long-term relationships with our suppliers;
• sharing risks and rewards with our suppliers;
• each supplier must be less than 25% dependent on ASML;
• dual sourcing of knowledge, globally, together with our suppliers; and
• single, dual or multiple sourcing of products, where possible.
Value sourcing aligns the actual supplier performance to our requirements on quality,
logistics, technology and total costs. As from 2003 onwards, we are assembling a portion
of our components and subassemblies at our facilities in Wilton, Connecticut, U.S.
Zeiss is our sole external supplier of lenses and other critical optical components,
which account for between 20 percent and 50 percent of our cost of goods sold, varying by
product type, and which collectively accounted for 36 percent of our aggregate cost of goods
sold in 2003. Our relationship with Zeiss is structured as an exclusive strategic alliance
pursuant to several agreements concluded in 1997, 2000 and 2003 that set forth a framework
for cooperation in the areas of product research, design, planning and manufacturing and
pricing, as well as customer support and warranty service. Dr. Ing. Peter H. Grassmann,
50ASML ANNUAL REPORT 2003
the former Chief Executive Officer of Zeiss, is a member of ASML’s Supervisory Board.
See Item 6 “Directors, Senior Management and Employees”.
From time to time, the number of systems we have been able to produce has been limited by
the capacity of Zeiss to provide us with lenses and optical components. Zeiss currently is
capable of manufacturing a limited number of lenses and optical components for our wafer
steppers and Step & Scan systems and is highly dependent on Zeiss’ manufacturing and
testing facility in Oberkochen, Germany. Given our level of sales in 2003, we were not
constrained by the number of lenses that Zeiss can produce. However, if our sales increase,
the inability of Zeiss to maintain and increase production levels could result in us being unable
to fulfill orders for our systems, which could damage relationships with current and
prospective customers and have an adverse effect on our business, financial condition and
results of operations. See Item 3.D. “Risk Factors, The Number of Systems We Can Produce
is Limited by our Dependence on a Limited Number of Suppliers of Key Components.”
We have agreed with Zeiss to continue our strategic alliance on an exclusive basis until either
party provides at least three years’ notice of its intent to terminate. Although we believe such
an outcome is unlikely, if Zeiss were to terminate its relationship with us, or if Zeiss were
unable to maintain production over a prolonged period (such as because of a catastrophe
affecting Zeiss’ Oberkochen facility), we would effectively cease to be able to conduct our
business.
Research and Development
The semiconductor manufacturing industry is subject to rapid technological changes and new
product introductions and enhancements. We believe that continued and timely development
and introduction of new and enhanced systems are essential for us to maintain our
competitive position. To meet this ongoing requirement, we have established sophisticated
development centers in the Netherlands and the United States.
We have historically devoted a significant portion of our financial resources to research and
development programs and we expect to continue to allocate significant resources to these
efforts. We also apply for subsidy payments in connection with specific development projects
under programs sponsored by the Netherlands government, the European Community and the
U.S. government (Defense Advanced Research Projects Agency, or “DARPA”). Amounts
received under these programs generally are not required to be repaid, except for technical
development credits (Technische Ontwikkelingskredieten, or “TOK”) received from the
Netherlands Ministry of Economic Affairs, which are repayable contingent upon actual sales
of products, the development of which is funded by the respective credits. See our
discussions of research and development in Item 5 “Operating and Financial Review and
Prospects”, and Notes 1 and 15 to our consolidated financial statements.
We invested EUR 306 million on research and development in continuing operations in 2003,
a 6 percent decrease compared to 2002. We are also involved in joint research and
development programs with both public and private partnerships and consortiums, involving
leading chip manufacturers, as well as Netherlands government and European Union programs
such as MEDEA+ (a EUREKA project) and IST. We aim to own or license our jointly developed
technology and designs of critical components.
51ASML ANNUAL REPORT 2003
In 2003, our research and development efforts propelled further development of the TWINSCAN
platform along with several leading edge technologies, including 248 nanometer, 193 nanometer,
immersion, 157 nanometer and EUV. Our research and development activities in 2003 also led
to productivity enhancements for our other existing product families.
Intellectual Property
We rely on patents, copyrights, trade secrets and other measures to protect our proprietary
technology. We aim to have appropriate licensing in place with our suppliers with respect to
our jointly developed technology or, alternatively, to obtain ownership rights on know-how
and designs of critical components. However, we face the risk that these measures will be
inadequate. Competitors may be able to develop similar technology independently.
Our pending patent applications may not be issued as intended, and intellectual property laws
may not sufficiently support our proprietary rights. In addition, litigation may be necessary in
order to enforce our intellectual property rights, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement. Any such litigation may
result in substantial costs and diversion of resources, and, if decided unfavorably to us,
could have a material adverse effect on our business, financial condition or results of
operations. We also may incur substantial acquisition or settlement costs where doing so
would strengthen or expand our intellectual property rights or limit our exposure to intellectual
property claims of third parties.
On occasion, certain of our customers have received notices of infringement from third
parties, alleging the ASML equipment used by those customers in the manufacture of
semiconductor products and/or the methods relating to the use of ASML equipment infringe
one or more patents issued to such parties. We have also been advised that, if claims were
successful, we could be required to indemnify such customers for some or all of any losses
incurred or damages assessed against them as a result of that infringement. We may also
incur substantial licensing or settlement costs where doing so would strengthen or expand our
intellectual property rights or limit our exposure to intellectual property claims by others.
Patent litigation with Ultratech Stepper, Inc
On May 23, 2000, Ultratech Stepper, Inc. (“Ultratech”) filed a lawsuit in the United States
District Court for the Eastern District of Virginia (which was subsequently transferred to the
United States District Court for the Northern District of California) against ASML.
Ultratech alleged that ASML is infringing Ultratech’s rights under a United States patent,
through the manufacture and commercialization in the U.S. of advanced photolithography
equipment embodying technology that, in particular, is used in Step & Scan equipment.
Ultratech’s complaint seeks injunctive relief and damages. On August 16, 2002, the Court
granted ASML’s motion for summary judgment of non-infringement based upon the previously
reported favorable interpretation by the Court as to the scope and meaning of the claims of
the asserted patent. A final judgment on those favorable rulings was subsequently entered
in ASML’s favor and ASML’s challenge to the validity and enforceability of the patent was
dismissed without prejudice in light of the finding of no infringement. Ultratech has taken an
appeal to the United States Court of Appeals for the Federal Circuit from the judgment in
ASML’s favor, where the matter has been briefed and now awaits oral argument and
disposition by the Court.
52ASML ANNUAL REPORT 2003
We continue to believe that Ultratech’s claims are without merit and that ASML’s defenses are
strong. ASML will continue to assert these defenses vigorously.
Patent litigation with Nikon
Since late 2001, we have been a party to a series of civil litigations and administrative
proceedings in which Nikon alleges ASML’s infringement of Nikon patents relating to
photolithography. ASML in turn filed claims against Nikon. These proceedings are summarized
below, and more detail is presented in Note 14 to our consolidated financial statements.
The proceedings are at various stages of advancement, and their ultimate outcome is
therefore uncertain. In each case, however, we believe we have meritorious defenses to
Nikon’s claims, including that Nikon’s patents are both not infringed and are invalid, as well
as valid counterclaims. We intend to vigorously pursue these defenses and counterclaims.
If a final non-appealable decision that was adverse to ASML were to be rendered in any of
these proceedings, however, our ability to conduct sales in one or more significant markets
could be substantially restricted or prohibited, which in turn could have a material adverse
effect on our financial condition and results of operations.
Proceedings in the United States
In December 2001, Nikon filed a complaint with the U.S. International Trade Commission
("ITC") alleging that ASML’s photolithography machines infringe seven patents held by Nikon
and seeking to exclude ASML from importing into the United States any infringing products.
A trial before an administrative law judge was completed in November 2002 and, in late
January 2003, the administrative law judge initially determined that ASML had not committed
any violation. Nikon then appealed the decision to the ITC. The ITC then adopted the
administrative law judge’s initial determination that ASML did not infringe any valid,
enforceable patent of Nikon’s and had not violated Section 337. Nikon has appealed the ITC’s
decision to the Court of Appeals for the Federal Circuit. A decision from the Court of Appeals
is not expected before mid 2004.
In December 2001, Nikon also filed a separate patent infringement action in the U.S. District
Court for the Northern District of California. In that proceeding, Nikon alleges infringement of
five Nikon patents and seeks injunctive relief and damages. In April 2002, ASML filed a
counterclaim in the ITC action, alleging that Nikon’s photolithography machines sold in the
United States infringe five ASML patents. This counterclaim was subsequently transferred to
the U.S. District Court for the Northern District of California. Nikon filed a second patent
infringement action in that court alleging infringement of six out of the seven patents from the
ITC action and two additional patents. Discovery in the California litigation is currently
ongoing. We do not expect a trial before late 2004.
Proceedings in Japan
In July 2003, Nikon withdrew its counterclaim against ASML filed in October 2002, in which
Nikon argued that ASML’s photolithography machines infringed 12 Japanese patents held
by Nikon. In November 2003, Nikon filed a new complaint against ASML and its subsidiary in
Japan alleging that ASML’s photolithography machines sold in Japan infringe patents held by
Nikon. A final decision for this litigation is not expected before 2006. The patent infringement
actions filed by ASML in August 2002 and in January 2003 are still pending at the Tokyo
53ASML ANNUAL REPORT 2003
District Court. In January 2004, ASML filed a new complaint against Nikon in the Tokyo
District Court. Final non-appealable decisions for these cases are not expected before 2005.
Proceedings in Korea
In October 2002, Nikon filed a patent infringement action against ASML and its Korean
subsidiary, alleging that ASML’s photolithography machines infringe five of Nikon’s patents,
four of which are related to Nikon’s patents asserted in its U.S. litigation. Both sides have
filed briefs with the court on the preliminary issues. In January 2003, ASML filed a patent
infringement complaint against Nikon and its Korean subsidiary, seeking to enjoin Nikon from
the manufacture and sale of lithography devices that infringe another of ASML’s patents.
A decision by the Korean District Court is not expected before 2005. A final non-appealable
decision (through the High Court appeal and the Supreme Court appeal) is not expected
before 2006.
Competition
The semiconductor equipment industry is highly competitive. The principal elements of
competition in our markets are the technical performance characteristics of a photolithography
system and the value of ownership of that system based on its purchase price, maintenance
costs, productivity and customer service and support. In addition, we believe that an
increasingly important factor affecting our ability to compete is the strength and breadth of our
portfolio of patent and other intellectual property rights relative to those of our competitors.
We believe that the market for photolithography systems and the investments required to be
a significant competitor in this market have resulted in increased competition for market share
through the aggressive prosecution of patents to prevent competitors from using and
developing their technology. Our competitiveness will increasingly depend upon our ability
to protect and defend our patents, as well as our ability to develop new and enhanced
semiconductor equipment that is competitively priced and introduced on a timely basis.
See Item 3.D. “Risk Factors, We Face Intense Competition” and Note 14 to our consolidated
financial statements.
Government Regulation
Our business is subject to direct and indirect regulation in each of the countries in which our
customers or we do business. As a result, changes in various types of regulation could affect
our business adversely. The implementation of new technological or legal requirements could
impact our products, manufacturing or distribution processes, and could affect the timing of
product introductions, the cost of our production or product as well as their commercial
success. Moreover, environmental and other regulations that adversely affect the pricing of
our products could affect our net sales and operating profit. The impact of these changes in
regulation could affect adversely our business even where the specific regulations do not
directly apply to us or to our products.
54ASML ANNUAL REPORT 2003
C. Organizational Structure
ASML Holding N.V. is a holding company that operates through its subsidiaries. ASML Holding
N.V.’s material subsidiaries, each of which is a direct wholly-owned subsidiary, are as follows:
See Exhibit 8.1 for a full list of ASML Holding N.V.’s subsidiaries.
D. Property, Plants and Equipment
We own several facilities, including office facilities, in the Netherlands, the United States
and Japan. The book value of the buildings used in our continuing operations and owned
by ASML amounted to EUR 93 million as of December 31, 2003. The book value of buildings
included in our assets held for sale was EUR 3 million as of December 31, 2003. We lease
our headquarters, applications laboratory and research and development facilities,
manufacturing (assembly and testing) premises and some of our office facilities in Veldhoven,
the Netherlands. The operating leases for all of our major facilities are long-term and contain
purchase options.
In 2003, we consolidated our office facilities at our headquarters in Veldhoven. Some of these
office facilities are financed through a special purpose vehicle that is a variable interest entity.
See Item 5.E. “Off-Balance Sheet Arrangements” and Note 12 to our consolidated financial
statements. We also own and have regional sales and service offices and manufacturing
facilities located worldwide near our customers’ premises.
We expect capital expenditures in 2004 to range between EUR 75 million and EUR 85 million,
of which the majority will be allocated to IT projects and equipment and to machinery and
tooling equipment. See Item 4.A. “History and Development of the Company, Capital
Expenditures”.
See also Item 5.B. “Liquidity and Capital Resources” and Item 4.A. “History and Development
of the Company, Capital Expenditures” and Note 9 to our consolidated financial statements.
We rent certain of our facilities and office space through long-term lease contracts with
leasing companies. See Item 5.E. “Off-Balance Sheet Arrangements” and Note 12 to our
consolidated financial statements.
While we anticipate continuing capital expenditures for the purpose of upgrading and, where
appropriate, incrementally expanding our facilities, we believe that our existing facilities are
sufficient to accommodate the likely range of production volumes that we might experience in
the market for semiconductor manufacturing equipment for the next 2 years.
55ASML ANNUAL REPORT 2003
ASML Holding N.V.
(The Netherlands)
ASML Netherlands B.V.
(The Netherlands)
ASML Hong Kong, Limited
(Hong Kong)
ASML US, Inc.
(United States)
Item 5
Operating and
Financial Review
and Prospects
Executive Summary
ASML is the world’s leading provider of lithography systems for the semiconductor industry,
manufacturing complex machines that are critical to the production of integrated circuits
or chips. Headquartered in Veldhoven, the Netherlands, ASML operates globally, with activities
in Europe, the United States and Asia.
The year 2003 was an unprecedented third consecutive year of downturn in the global
semiconductor industry. The semiconductor industry, traditionally one of the more cyclical
industries, continued to suffer from overcapacity that had resulted from its high level of capital
expenditures during 2000. Over the last three months of 2003, our order intake has shown
considerable strength for systems to be shipped in the first half of 2004. Approximately
80 percent or 100 systems of our backlog as of December 31, 2003 is expected to be shipped
in the first half of 2004. Therefore, the visibility of our sales level for the second half of 2004 is
still unclear.
Our sales consist of product sales and service sales. Product sales generated approximately
88% of total net sales in 2003. During 2003, we shipped 169 systems to our customers,
compared to 205 in 2002.
Cost of sales reflects primarily the costs of components and subassemblies that comprise our
lithography systems and labor used in the manufacture of our systems. We procure system
components and subassemblies from a single supplier or a limited group of suppliers in order
to ensure overall quality and timeliness of delivery. As from 2003 onwards, we are assembling
a portion of our components and subassemblies at our facilities in Wilton, Connecticut, U.S.,
which had previously been outsourced to an outside vendor.
The semiconductor manufacturing industry is subject to rapid technological change and
frequent new product introductions and enhancements. The cost to develop new systems
is extremely high. Our high level of research and development expenditures reflects our
continuous effort to be a technological leader.
In December 2002, we announced cost containing measures, including a reduction in
workforce, divestment of our Thermal business and termination of our Track operations.
During the year 2003, we implemented the workforce reduction and substantially completed
the discontinuance of our Track and Thermal businesses. In July 2003, we announced
a further workforce reduction, of which the majority is planned in the Netherlands. Currently,
ASML and its Works Council are nearing the completion of a joint study on implementing this
workforce reduction in the Netherlands. As a consequence, the Dutch workforce reduction has
been delayed and, any corresponding cost reductions have been delayed. We believe
that by adjusting labor capacity and increasing operating flexibility, we can reduce our
break-even level by the end of 2004 to approximately 130 new systems from its current level
of approximately 160 new systems, depending upon our product mix. The break-even level
is the minimum number of new systems that need to be sold in a year in order to achieve
net profit in that year.
ASML has sharpened its strategic focus through the work of multiple cross-functional process
improvement teams. These process improvement teams are focused on streamlining and
56ASML ANNUAL REPORT 2003
integrating main business processes and are striving to improve ASML’s working capital
management in order to further strengthen its cash position. These working capital
improvement programs include initiatives in the area of inventory control, early collection of
receivables and effective management of payments and, during 2003, contributed significantly
to the EUR 509 million net cash provided by our continuing operating activities.
A. Operating Results
Critical accounting policies
Our discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with
U.S. GAAP. The preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate
our estimates, including those related to customer incentives, bad debts, inventories, tangible
assets, intangible assets, leases, income taxes, financing operations, warranty and installation
obligations, order cancellation costs, restructuring, long-term service contracts, pensions and
other post-retirement benefits, and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions.
We have identified the policies below as critical to our business operations and the
understanding of our results of operations.
Recognition of revenues, income and expenses
We distinguish between revenues from “new” and “proven” technology systems. Revenues
from “proven technology” systems are recognized upon shipment, since title passes to the
customer at that moment and the customer has unconditionally accepted the system during
a factory test prior to shipment. Revenues from “new technology” systems are deferred until
installation and acceptance at the customer’s premises is completed. As soon as a track
record has been established regarding the successful and timely installation and acceptance
of equipment previously identified as “new technology”, ASML considers the equipment to
be “proven technology”. At that time, ASML changes the timing of revenue recognition to the
shipment date in accordance with its revenue policy for “proven technology” and recognizes
previously deferred revenue. We assess the change from “new technology” to “proven
technology” based on installation times, full technical compliance with contract specifications
and customer site sign-off for approval. In the second half of 2002, our TWINSCAN
technology, which had been previously identified as “new technology,” met the criteria for
“proven technology.” A different assessment could have resulted in the deferral of a significant
amount of revenues from uninstalled TWINSCAN systems in 2002, for which the revenue was
recognized upon shipment during that year.
57ASML ANNUAL REPORT 2003
During 2003, we delivered 2 full-field 157 nanometer Step & Scan systems to research
institutes and recorded related funding and costs under research and development.
In December 2003, we received the industry’s first order for an immersion lithography system,
ASML’s TWINSCAN XT:1250i. We are currently performing research and development on
immersion lithography, which is one of the possible technologies to achieve lowering the cost
per wafer and increasing resolution. The first feasibility test of immersion on a Step & Scan
system was completed in the second half of 2003. The next step in the development of
immersion lithography technology is the development of early production tools that will allow
our customers to verify the immersion process qualification under specific process conditions.
Delivery of the first tool is planned for the third quarter of 2004. Whether we will consider this
new tool as “new technology” or “proven technology” will depend on our progress in
developing immersion lithography technology during 2004.
The fair value of installation services provided to our customers is initially deferred and is
recognized when the installation is completed. The unearned revenue balance from installation
services amounted to approximately EUR 5 million at December 31, 2003. Sales from service
contracts are recognized when performed. Revenue from prepaid service contracts is
recognized over the term of the contract. As of December 31, 2003, the unearned revenue
balance on prepaid service contracts amounted to approximately EUR 5 million.
Warranty
We provide standard warranty coverage on our systems for twelve months, providing labor
and parts necessary to repair systems during the warranty period. The estimated warranty
costs are accounted for by accruing these costs for each system upon recognition of the
system sale. The estimated warranty cost is based on historical product performance and field
expenses. Based upon historical service records, we calculate the charge of average service
hours and parts per system to determine the estimated warranty charge. We update these
estimated charges periodically. The actual product performance and/or field expense profiles
may differ, and in those cases we adjust our warranty reserves accordingly. Future warranty
expenses may exceed our estimates, which could lead to an increase in our cost of sales.
A non-standard warranty generally includes services incremental to the standard warranty
coverage. Revenues from the sale of a non-standard warranty are deferred as unearned
revenue and are recognized ratably as revenue when the applicable warranty term
commences. The unearned revenue balance on non-standard warranties amounted to
approximately EUR 39 million as of December 31, 2003.
Evaluation of long-lived assets for impairment and costs
associated with exit or disposal activities
We evaluate our long-lived assets, including intellectual property, for impairment whenever
events or changes in circumstances indicate that the carrying amount of those assets may
not be recoverable. If an impairment test is warranted, we assess whether the undiscounted
cash flows expected to be generated by our long-lived assets exceed their carrying value.
If this assessment indicates that the long-lived assets are impaired, the assets are written
down to their fair value. These assessments are based on our judgment, which includes the
estimate of future cash flows from long-lived assets and the estimate of the fair value of an
asset if it is impaired. We initiated impairment assessments in 2003 based on the following
58ASML ANNUAL REPORT 2003
events: discontinuance of our Track and Thermal businesses, workforce reductions, net losses
from continuing operations and the consolidation of our office facilities at our headquarters in
Veldhoven. As a result of those assessments, we recorded impairment charges and exit costs
as follows:
• During 2003, we evaluated assets related to our Thermal business for impairment
anticipating the expected proceeds from its sale. Accordingly, we recorded approximately
EUR 16 million impairment charges. The impairment charges were determined based on the
difference between the assets’ carrying value and the value used in the negotiations with
several potential buyers. In October 2003, we substantially completed the sale of our
Thermal business; no gain or loss was realized on the sale as the net assets were stated at
the value equal to the proceeds of the sale.
• In addition, during 2003, we recorded impairment charges of approximately EUR 3 million on
a building in the United States, previously used by our Track business, for which there are
insufficient cash flows to support the carrying cost. The property and equipment impairment
was determined on the difference between the building’s estimated fair value, as indicated
by an independent real estate appraiser, and its carrying value.
• During 2003, we recorded a charge of approximately EUR 7 million relating to the
consolidation of our office and warehouse facilities at our headquarters in Veldhoven as we
ceased using certain of our facilities. The facility exit charges included:
- estimated future obligations for non-cancelable lease payments (net of estimated sublease
income of EUR 25 million). We estimated the cost of exiting by referring to the contractual
terms of the lease agreements and by evaluating the sublease agreements concluded for
these facilities or, where applicable, by referring to amounts being negotiated; and
- the impairment of property and equipment (primarily leasehold improvements) for which
there are insufficient cash flows to support the carrying cost. The property and equipment
impairment was determined based on the difference between the assets’ estimated fair
value and their carrying value.
• During 2003, we recorded impairment charges of EUR 12 million on machinery and
equipment, for which there are insufficient cash flows to support the carrying cost.
The impairment charges were determined based on the difference between the assets’
estimated fair value and their carrying value.
Since our estimates of future cash flows are subject to considerable judgment and changes
in circumstances, actual cash flows may be higher or lower. Although we believe the above-
mentioned events to be the known events that might indicate asset impairment, other assets
may be subject to loss in value due to uncertain market circumstances, which could result in
further impairment charges in connection with these assets. See Notes 2, 3 and 9 to our
consolidated financial statements.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market value.
Cost includes net prices paid for materials purchased, charges for freight and customs duties,
production labor cost and factory overhead. Inventory provisions are made for slow moving,
obsolete or unsaleable inventory and reviewed on a quarterly basis. Our methodology involves
matching our on-hand and on-order inventory with our manufacturing forecast. We evaluate
for determining inventory provisions the inventory in excess of our forecasted needs on both
technological and economical criteria and take appropriate provisions to reflect the risk of
59ASML ANNUAL REPORT 2003
obsolescence. This methodology is significantly affected by our forecasted needs for
inventory. If actual demand or usage were to be lower than estimated, additional inventory
provisions for excess or obsolete inventory may be required, which could have a material
adverse effect on our business, financial condition and results of operations. See Note 6
to our consolidated financial statements.
Restructuring
ASML applies the criteria defined in SFAS No. 146, “Accounting for Costs Associated with Exit
or Disposal Activities” and SFAS No. 112, “Employers’ Accounting for Postemployment Benefits”,
in order to determine when a liability for restructuring or exit costs should be recognized.
With respect to employee termination costs, we are adopting SFAS No. 146 (effective since
January 1, 2003) in the case of benefit arrangements that, in substance, do not constitute
an ongoing benefit arrangement. SFAS No. 112 is adopted when termination benefits are
provided under an ongoing benefit arrangement. SFAS No. 146 establishes that a liability for
a cost associated with an exit or disposal activity shall be recognized and measured initially
at its fair value in the period in which the liability is incurred; that is when a detail plan exists,
has been committed to by management and communicated to the employees. SFAS No. 112
establishes that a liability for termination benefits provided under an ongoing benefit
arrangement covered by SFAS No. 112 is recognized when the likelihood of future settlement
is probable and can be reasonably estimated. Accordingly, the application of SFAS No. 146
or SFAS No. 112 may affect the timing of recognition, as well as the amounts recognized.
On December 18, 2002, ASML announced workforce reductions of approximately
700 positions worldwide. The related restructuring charges of EUR 7 million were recorded
in 2003 since the details on the plan had not been finally determined by December 31, 2002.
As of December 31, 2003, this plan has been fully effectuated.
On July 16, 2003, ASML announced further workforce reductions of approximately
550 positions worldwide, of which the majority is planned in the Netherlands. ASML recorded
a provision of EUR 15 million as an ongoing benefit arrangement during 2003 in respect of this
workforce reduction announced in July 2003. The amount of the provision was based upon the
details of the exit plan agreed on with our Works Council in the Netherlands for the workforce
reductions announced in December 2002. Currently, the Board of Management and the Dutch
Works Council are nearing the completion of a joint study on implementing these workforce
reductions in the Netherlands. Consequently, the Dutch workforce reduction has been
delayed.
Other exit costs include purchase and other commitments to be settled or fulfilled. Related
costs are estimated based on expected settlement fees and committed payments, taking into
account future potential benefits, if any, from those commitments.
Income tax
We use the asset and liability method in accounting for income taxes. Under this method,
deferred tax assets and liabilities are recognized for the tax effect of incurred net operating
losses and for tax consequences attributable to differences between the balance sheet
carrying amounts of existing assets and liabilities and their respective tax bases.
60ASML ANNUAL REPORT 2003
Technology
leadership
If it is more likely than not that the carrying amounts of deferred tax assets will not be realized,
a valuation allowance will be recorded to reduce the carrying amounts of those assets.
In 2003, we performed an extended assessment with respect to our ability to realize our
deferred tax assets resulting from net operating loss carry-forwards. In this analysis, we
incorporated the application of a proposed Advanced Pricing Agreement (“APA”) that is under
negotiation with the Dutch and United States tax authorities. Furthermore, in assessing the
need to record a valuation allowance on our deferred tax assets, we took into account
possible tax planning alternatives, and expected future profits in the Netherlands and in the
United States. Based on our assessment, we believe that it is more likely than not that the
net operating losses will be offset by future taxable income before the statute on loss
compensation expires. However, if our assessment were incorrect, a significant portion
of the deferred tax assets recorded on our balance sheet would have to be written down.
See also Item 3.D. “Risk Factors, Our Ability to Realize Our Deferred Tax Assets is Uncertain”.
ASML vision, mission, goal and business strategy
Vision – Offering the right technologies at the right time combined with superior
value of ownership measured by customers’ return on investment
in our tools.
Mission – Providing leading edge imaging solutions to continuously improve our
customers’ global competitiveness.
Goal – Achieving sustainable and profitable market leadership through
customer satisfaction.
Business – Maintaining leadership by providing high value drivers for customers while
strategy striving for operational excellence that results in top financial performance.
Business strategy
ASML’s commitment is to be the industry’s global leader in our core competence of
semiconductor lithography equipment, which images nanometric circuit patterns on a silicon
wafer, the material from which tiny chips (integrated circuits) are made. We define and direct
our business strategy through technology leadership, customer focus and operational excellence.
We drive technology leadership along the semiconductor industry roadmap in close
consultation with existing customers and potential new ones. This means we seek to satisfy
the needs of different types of chipmakers by customizing and configuring products to provide
premium value for the owners of ASML lithography systems. We pursue world class
productivity to benefit every type of customer. This includes high volume, reliability demands
associated with production of memory chips; fast and frequent changeovers required by
foundries or made-to-order chip contractors; complexity of making microprocessors; and
unique specifications set by independent device manufacturers.
61ASML ANNUAL REPORT 2003
Customer focus
Changing technology and rising capital investments increasingly influence the equipment
choices of chipmakers. Therefore, ASML continually anticipates, adapts and maintains its
product offerings to embrace the stages, speed and size of growth in different lithography
market segments. The Company’s product range for steppers and advanced Step & Scan
systems spans the industry’s current wavelength technology for 200 and 300 millimeter wafers
alike. Our proven products cover 365, 248 and 193 nanometer wavelengths, addressing the
range of market needs for leading edge as well as less critical line widths. Since 2000, we
offer the industry’s only dual-stage wafer imaging system – our TWINSCAN platform – that
allows exposure of one wafer while simultaneously measuring another wafer.
Consistent with our strategy to remain at the industry forefront for chipmaking, in 2003,
we shipped the industry’s first full-field Step & Scan tool at the 157 nanometer wavelength.
In 2003, we also introduced our new immersion lithography system, a pioneering and promising
product that replaces the air over the wafer with fluid to enhance focus and shrink line widths.
Consistent with a business strategy focused on our core lithography competence, we also
strive to enhance productivity and process performance in the lithography area of chipmaking
where wafers spend most of their overall process time. We form and maintain strategic
alliances with other semiconductor equipment suppliers, allowing us to offer customers more
complete solutions. For example, we have joint development programs with leading makers of
track equipment in the so-called litho-cluster, where wafer coating and exposure can couple
to better meet demands of chipmakers. We are seeking to jointly develop an optical maskless
lithography system to reduce time to market of new devices and help solve escalating mask
costs, an important factor for new semiconductor designs that feature advanced and ever
smaller critical dimensions.
ASML also continues to offer solutions for special application markets and to provide
proprietary mask technologies and software products that extend the limits of optical
lithography for semiconductor manufacturing.
ASML’s strategic pursuit is to offer technology choice, incremental quality and sustainable
levels of added value. We increase the customization of our products for customers and strive
to provide superior integration of our tools with theirs. For a market and technology overview
and further information about ASML products, reference is made to Item 4.B. “Business
Overview.”
Customer focus is central to the Company’s strategic pursuit of market share leadership. And
ASML’s strategic approach to customer focus lies in the empowerment of multi-discipline
account management teams. Our account managers represent our customers across every
function and business process at ASML, from marketing and technology to logistics and
customer support. Doing so ensures that everyone at ASML is kept informed and involved, as
appropriate, in the Company’s customer focus process.
We track and treat levels of customer satisfaction three ways: our own systematic methods;
ratings provided by individual customers using their own criteria, and independent industry
surveys. The Company’s commitment to customers is to develop, install and support
62ASML ANNUAL REPORT 2003
Operational
excellence
technological tools for volume production. Doing so enables customers to become better
competitors and make more profit in the medium and long term.
Strategically, we engage customers in very early stages of technology development; we listen
to their needs surrounding product introduction and volume utilization. Together, we create a
dynamic and shared roadmap that begins with a customer need and ends with a customer
solution. ASML professionals continue building customer relationships as we assist in developing
and delivering technology and associated results that are above and beyond normal
expectations. As a result, ASML not only maintains its technology leadership, but also
secures market leadership.
We foster a culture of openness as the core of our customer focus, while providing customers
with confidentiality for their business, financial and proprietary information. In addition,
customer support training provides leading edge learning solutions to meet customer needs
involving operators, technicians and engineers for service, application, process and specialist
requirements. The Company’s strategy of superior value for owners of ASML systems allows
each customer to operate their chip fabrication facilities – anywhere in the world – with the
highest productivity.
When customers are satisfied, then they have confidence to commit capital expenditures:
customers repeat purchases of ASML lithography systems and buy additional products and
services from ASML. It also means that customers are willing to pay premiums consistent
with ASML’s added value, in the face of fierce pricing competition from rivals.
To achieve technology leadership and customer focus, it is also important to look inward.
During 2003, inside ASML we sharpened our strategic focus through the work of multiple
cross-functional process improvement teams. From an operational perspective, these process
improvement teams are striving to streamline and integrate main business processes such as
new product introduction, acquisition of orders from customers, fulfillment of orders, and our
post-delivery support and services. We strive to measure the output of each process, namely its
quantified results and how it adds value.
ASML’s business strategy includes outsourcing the majority of components and
subassemblies that make up our lithography products. We work in partnership with suppliers,
jointly operating a strategy known as Value Sourcing. It is based on the QLTC principle that
stands for quality, logistics, technology and total cost. With ASML Value Sourcing, we strive
to attain flexibility, best-of-breed contributions and cost savings. It exemplifies mutual
commitment, alongside shared risk and reward. Selected sourcing from our own facilities in
the Netherlands and in the United States provides an additional check on supplier
performance.
The Company’s value of ownership proposition is a strategic driver for increasing sales.
This means customers assess ASML’s added value. Their calculated return on capital
employed in semiconductor fabrication facilities supports ASML’s ability to maintain
pricing for our lithography systems. Internally, ASML is committed to improvements in gross
margin by reducing cost of goods.
63ASML ANNUAL REPORT 2003
Operational excellence is an internal strategic condition for increasing flexibility and reducing
our breakeven level for the number of systems that we manufacture, depending on the mix of
products ordered by customers in different market segments in various regions of the world.
With a lower cost base and a higher capacity for flexibility, ASML can satisfy customer
demand on a timely basis and continue to strengthen our competitive position.
Excellent people help make operational excellence happen. As technology roadmaps and
customer requirements become more demanding, ASML needs the best talent available:
fewer, better qualified, more completely committed people. The Company’s human resource
strategy embraces our unique culture of individual and team commitment that makes
outstanding accomplishments possible.
Given the structural changes and intensified cyclical conditions in the world market for
semiconductor lithography systems, the Company’s strategy is to transform our technology
and market success into a sustainable business success through operational excellence.
This means benchmarking financial results versus peer technology companies. It also means
pursuit of predictable quarterly results that are consistent with shareholder expectations.
In summary, the Company’s commitment is to add measurable value and long-term results to
benefit our customers as they design, produce and price their products.
Financial criteria for ASML
We strive to provide to our shareholders attractive return on their invested capital. This means
that we will continue working on increasing the value of ownership (see Item 4.B. “Business
Overview”) to our customers resulting in higher average unit sales prices for our systems.
Furthermore, we will continue on controlling our cost base by focusing on cost of goods
reduction programs and controlling research and development costs and selling, general and
administrative expenses. Finally, we intend to further improve our working capital management.
Our working capital improvement program includes inventory control, early collection of our
receivables and effective management of payments.
To reflect our efforts in achieving return on capital invested by our shareholders, we measure
ourselves, amongst others, on the following financial key performance criteria: gross margin,
operating margin, inventory turns, days sales outstanding, operating income and market share.
Results of Operations
The following discussion and analysis of results of operations should be viewed in the context
of the risks affecting our business strategy, described in Item 3.D. “Risk Factors”.
64ASML ANNUAL REPORT 2003
Operational excellence is a strategic pillar that supports reduction of fixed and variable costs
to increase operating profit and generate cash from working capital. Operational excellence
enhances efficiencies and effectiveness. This means cost reductions in research and
development; selling, general and administrative expenses; customer support; information
technology and management systems; inventory and work-in-progress; manufacturing and
facilities management; and other activities. Operational excellence strengthens the Company’s
ability to offer customers a range of technological and system choices at the right time.
Our 2001 merger with SVG has been accounted for under the “pooling of interests” method.
Therefore, our consolidated financial statements for the year ended December 31, 2001 reflect
the combination of financial statements of our historical operations with those of SVG.
Our decision in December 2002 to sell our Thermal business and to terminate our Track
business has resulted in separate disclosure for continuing and discontinued operations.
Our consolidated financial statements for the year ended December 31, 2001, have been
retroactively reclassified in order to reflect the impact of this decision.
Set forth below are our consolidated statements of operations from continuing operations data
for the three years ended December 31, 2003, expressed as a percentage of total net sales:
Year ended December 31 2001 2002 2003
Total net sales 100.0% 100.0% 100.0%
Cost of sales 98.01 76.1 76.12
Gross profit on sales 2.0 23.9 23.9
Research and development costs 21.9 16.6 19.8
Research and development credits (1.0) (1.3) (1.2)
Selling, general and administrative costs 15.5 13.4 13.8
Restructuring and merger and acquisition related charges 2.8 N/A 1.6
Operating loss from continuing operations (37.2) (4.8) (10.0)
Interest expense, net 0.5 1.9 1.9
Loss from continuing operations before income taxes (37.4) (6.7) (11.9)
Benefits from income taxes (11.3) (2.2) (3.9)
Net loss from continuing operations (26.1) (4.5) (8.1)
1 Includes restructuring charges of EUR 400 million.2 Includes restructuring charges of EUR 5 million.
Results of operations from continuing operations 2003
compared with 2002
During the year 2003 we continued to face a significant downturn in the semiconductor industry,
which started in 2001. In the last quarter of 2003, we have seen what may be the beginning of
an upturn that is apparent in most business segments within the semiconductor industry.
65ASML ANNUAL REPORT 2003
Consolidated sales and gross profit
The following table shows a summary of sales (revenue and units sold), gross profit on sales
and average sales price data on an annual basis for the years ended December 31, 2003 and 2002:
Year ended December 31 2002 2003
First Second Full First Second Full
half year half year year half year half year year
Net sales (EUR million) 788 1,171 1,959 647 896 1,543
Net product sales (EUR million) 674 1,067 1,741 553 804 1,357
Net service sales (EUR million) 114 104 218 94 92 186
Total units recognized 78 127 205 74 95 169
Total new systems recognized 73 110 183 55 71 126
Total used systems recognized 5 17 22 19 24 43
Gross profit on sales (% of sales) 29.6 20.0 23.9 19.4 27.2 23.9
Average unit sales price
for new systems (EUR thousands) 8,581 9,141 8,917 8,736 10,034 9,464
Average unit sales price
for used systems (EUR thousands) 1,162 763 854 1,816 2,162 2,018
Consolidated net sales from continuing operations consist of revenue from product sales
(systems and options) and service sales. Consolidated net sales decreased from 2002 to 2003
by approximately 21 percent. Product sales declined by approximately 22 percent from
2002 to 2003, primarily due to a decreasing number of new systems recognized, partially
offset by an increase in average unit sales price (“ASP”). The ASP for new systems increased
by approximately 6% reflecting a shift in our product portfolio towards an increased share of
our latest technology equipment (TWINSCAN systems), which accounted for 38 percent of
total shipment volume of new systems in 2003 compared to approximately 33 percent in 2002.
The number of new systems recognized decreased from 183 units in 2002 to 126 units in
2003 due to:
• a further decline in equipment demand by the semiconductor industry in 2003 after a modest
recovery shown in the first half of 2002 for delivery in the second half of 2002; and
• the effect of the accounting treatment of “new technology systems” (see “Critical Accounting
Policies”) resulting in additional recognition of EUR 138 million of revenues of 13 systems
in 2002 that were initially deferred in 2001.
The number of used systems sold increased from 22 units in 2002 to 43 in 2003. This increase
reflects the uncertain market conditions in which our customers seek opportunities to quickly
expand production capacity in their existing production facilities without significant capital
expenditures to secure long-term growth. These systems are used in less critical resolution
capabilities. The ASP for used systems increased by approximately 136 percent reflecting a
shift from our older PAS 2500 towards our newer PAS 5500 family, including scanner systems.
We estimate that the number of used systems sold will increase in 2004, provided that the
number of systems available on the market for repurchase is not limited.
66ASML ANNUAL REPORT 2003
Service sales showed a 15 percent decrease from EUR 218 million in 2002 to EUR 186 million
in 2003. This decrease is mainly due to:
• the decline in exchange rate of the USD versus the euro during 2003 which resulted in lower
revenues from USD denominated service contracts, which account for approximately
50 percent of our service revenues;
• the decline in service sales on our former activities in the Track business as a result of the
expiration of our warranty and service obligations. In December 2002, we decided to
terminate our activities in the Track business; however, decided to continue to service our
existing customers for whom we had warranty or other service obligations. Consequently,
customer support related to the Track business is not included in discontinued operations; and
• an increase in the number of customers that opted for in-house servicing instead of external
servicing.
Currently, approximately 90 percent of the global top 10 IC manufacturers are ASML customers.
In 2003, sales to one customer accounted for EUR 314 million, or 20 percent of net sales.
In 2002, sales to one customer accounted for EUR 377 million, or 19 percent of net sales.
Gross profit as a percentage of net sales in 2003 was equal to 2002 (23.9 percent).
The gross profit on new systems decreased from 24.3 percent to 21.7 percent due to the
negative influence of severe price competition (2.2 percent negative impact on our gross
profit), relatively more sales of newer technology systems having lower gross profit
(4.4 percent negative impact on our gross profit) and under-utilization of our production
facilities due to less sales (2.5 percent negative impact on our gross profit). This decrease in
gross profit was offset by lower repayments of Technical development credits as this program
was fully repaid during 2003 (1.5 percent positive impact on our gross profit), lower costs of
sales due to the replacement of independent sales agents with our own employees for the
purpose of servicing our Asian customers (1.0 percent positive impact on our gross profit) and
a decrease in charges to provisions for obsolete inventory (4.0 percent positive impact on our
gross profit).
The gross profit on service sales increased to 21.7 percent in 2003 from 7.3 percent in 2002.
This increase was primarily due to additional provisions in 2002 for obsolete service parts and
training system write-downs.
Lithography order backlog
We started 2003 with an order backlog of 110 systems (103 new and 7 used), and received
orders for delivery of 239 systems during the year. In 2003, we recorded 169 system sales
and 56 order cancellations or push-outs beyond twelve months, this resulting in an order
backlog of 124 systems (103 new and 21 used) as of December 31, 2003. The total value of
the backlog as of December 31, 2003 amounts to EUR 993 million, compared with a backlog
of approximately EUR 1,089 million as of December 31, 2002.
Research and development
Research and development costs decreased from EUR 324 million in 2002 to EUR 306 million
in 2003 as a result of more cost-efficient programs and workforce reductions. The level of
67ASML ANNUAL REPORT 2003
research and development expenditures reflects our continuing effort to introduce several
leading edge lithography products for 193 nanometer applications and the newest versions
of the TWINSCAN platform, combined with continued investments in in 248 nanometer high
numerical aperture (NA) program, immersion, next generation 157 nanometer lithography
solutions and EUV.
Our future operating results will depend significantly on our ability to produce products and
provide services that have a competitive advantage in our industry. To do this, we believe that
we must continue to make substantial investments in our research and development efforts.
Our research and development activities are intended to enable our customers to achieve a
higher return on their capital investments and higher productivity through cost-effective,
leading edge technology solutions.
Research and development credits decreased from EUR 26 million in 2002 to EUR 19 million
in 2003 due to a decreased volume for research and development expenditures that qualified
for credits. Included in 2002 credits is a postponed credit (EUR 3.5 million) on 2001
expenditures that was subject to certain criteria that were only achieved in 2002. We expect
the level of credits in 2004 to be similar or slightly higher than in 2003, although the precise
amount remains subject to further negotiation with the relevant granting authorities.
Selling, general and administrative costs
Selling, general and administrative costs decreased by 19.0 percent from EUR 263 million in
2002 to EUR 213 million in 2003, mainly as a result of workforce reductions and decreased
legal fees associated with patent infringement cases. Selling, general and administrative costs
as a percentage of net sales increased from 13.4 percent in 2002 to 13.8 percent in 2003,
as a result of the decline in net sales.
Restructuring costs
On December 18, 2002, ASML announced workforce reductions of approximately 700 positions
worldwide. With respect to this plan, we recorded in 2003 restructuring charges for a total
amount of EUR 7 million of which EUR 4 million in cost of sales and EUR 3 million in
restructuring costs. As of December 31, 2003, this plan has been fully effectuated.
On July 16, 2003, ASML announced further workforce reductions of approximately 550 positions
worldwide of which the majority is planned in the Netherlands. During 2003, ASML recorded
a provision of EUR 15 million as an ongoing benefit arrangement of which EUR 4 million is
included in cost of sales and EUR 11 million is included in restructuring costs. The amount of
the provision was based upon the details of the exit plan agreed on with our Works Council
in the Netherlands for the workforce reductions announced in December 2002. Currently,
the Board of Management and the Dutch Works Council are nearing the completion of a joint
study on implementing these workforce reductions in the Netherlands. Consequently,
the Dutch workforce reduction has been delayed.
During 2003, we recorded restructuring costs of approximately EUR 7 million relating to the
consolidation of our office and warehouse facilities at our headquarters in Veldhoven as we
ceased using certain of our facilities. The facility exit charges included estimated future
obligations for non-cancelable lease payments and the impairment of property and equipment
68ASML ANNUAL REPORT 2003
(primarily leasehold improvements) for which there are insufficient cash flows to support the
carrying cost.
Net interest expense
Net interest expense decreased from EUR 37 million in 2002 to EUR 29 million in 2003 due to
an increase in interest income, which is partially offset by an increase in interest expense.
Our interest income relates primarily to interest earned on our cash and cash equivalents.
Interest income increased compared with 2002, primarily due to higher cash and cash equivalent
balances throughout the year as a result of our improved working capital and issuance in May
2003 of EUR 380 million principal amount of our 5.50% Convertible Subordinated Notes due
2010. This was partially offset by a decrease in market short-term interest rates. Our interest
expense relates primarily to our convertible notes. Our interest expense increased in 2003
compared with 2002, primarily due to the issuance of the above-mentioned Convertible
Subordinated Notes, partially offset by the repurchases and redemption of our 520 million USD
4.25 percent Convertible Subordinated Notes during the second half of 2003.
Income taxes
Income taxes represented 32.7 and 32.4 percent of income before taxes in 2002 and 2003,
respectively. This decrease results from a change in distribution of pre-tax losses between
geographical areas. See Note 16 to our consolidated financial statements.
Discontinued operations
Results from discontinued operations comprise the results of our Thermal business,
which we substantially divested in October 2003, and our Track business which we terminated
in December 2002. Our decision to discontinue these businesses was the result of the
downturn in the semiconductor market, which has led to significant losses in these
businesses. Substantial future investments in these businesses would have been required
to achieve a positive contribution to our future financial results.
Year ended December 31 2002 2003
Revenues
Track 7,236 2,514
Thermal 105,929 38,198
Total 113,165 40,712
Loss from discontinued operations, net of taxes
Track loss from operations (27,991) (1,456)
Track exit costs (net of taxes) (30,626) (1,944)
Thermal loss from operations (61,161) (21,906)
Thermal exit costs (net of taxes) 0 (10,404)
Total (119,778) (35,710)
In December 2002 we reviewed our long-lived assets used in the Thermal business for
potential impairment and recorded no impairment charges. During 2003, we again reviewed
our long-lived assets for impairment as we entered into negotiations with several potential
buyers and accordingly recorded impairment charges of EUR 16 million.
In October 2003, we completed the sale of our Thermal business to a privately held company
69ASML ANNUAL REPORT 2003
formed by VantagePoint Venture Partners. At the time of the sale, no gain or loss was realized
as the net assets were stated at the value equal to the proceeds of the sale. The net loss of
our Thermal business amounted to EUR 32 million in 2003 compared to EUR 61 million in 2002.
The termination of the Track business resulted in an exit plan that included workforce
reduction, fixed asset impairments and inventory write-offs due to discontinued product lines.
The exit plan included the disposal of remaining assets related to the Track business.
In 2002, ASML decided to continue to service existing customers of its Track business
for whom ASML had warranty or other service obligations. Consequently, customer support
related to the Track business was not included in discontinued operations for 2002. In June
2003, ASML sold certain of its fixed assets and inventories related to its Track business to
Rite Track. No gain or loss was realized on the sale. The net loss of the Track business
amounted to EUR 3 million in 2003 compared to EUR 59 million for 2002. The net loss for
2002 included total pre-tax estimated exit costs of EUR 47 million. These exit costs included
asset impairments, inventory write downs, purchase and other commitment settlements and
employee termination costs. The net loss in 2003 relates mainly to impairment charges
recorded on a building in the United States, previously used by our Track business.
This impairment was determined on the difference between the building’s estimated fair value,
as indicated by an independent real estate appraiser and its carrying value.
Results of operations from continuing operations in 2002
compared with 2001
The semiconductor industry downturn, that began in 2001, showed, in the first half of 2002,
a modest recovery in equipment demand for order intake for delivery in 2002 and 2003.
The second half of 2002, however, showed a further deepening of the downturn. Our techno-
logical leadership in 2002 resulted in market gains in 2002, despite the overall decline.
Consolidated sales and gross profit
The following table shows a summary of sales (revenues and units), gross profit on sales and
average sales price on an annual basis for the years ended December 31, 2002 and 2001:
Year ended December 31 2001 2002
First Second Full First Second Full
half year half year year half year half year year
Net sales (EUR million) 831 758 1,589 788 1,171 1,959
Net product sales (EUR million) 700 636 1,336 674 1,067 1,741
Net service sales (EUR million) 131 122 253 114 104 218
Total units recognized 120 77 197 78 127 205
Total new systems recognized 108 72 180 73 110 183
Total used systems recognized 12 5 17 5 17 22
Gross profit on sales (% of sales) 29.7 (28.4) 2.0 29.6 20.0 23.9
Average unit sales price for new
systems (EUR thousands) 5,910 8,114 6,792 8,581 9,141 8,917
Average unit sales price for used
systems (EUR thousands) 1,061 1,330 1,140 1,162 763 854
Consolidated net sales increased by 23.3 percent. The increase in sales was caused
by a small increase in the number of shipments, from 197 units in 2001 to 205 in 2002,
70ASML ANNUAL REPORT 2003
and a relatively strong increase in ASP for new systems. The increase in the ASP reflected a
shift (e.g., from 200 millimeter to 300 millimeter and/or 248 nanometer to 193 nanometer) in
our product portfolio toward an increased share of the latest technology equipment,
which accounted for 30 percent of total shipment volume in 2002, compared to 4 percent in
2001. This technology includes products such as the leading edge, high numerical aperture
lens products for the 193 nanometer technology node, as well as those for 300 millimeter
TWINSCAN systems.
In 2002, approximately 70 percent of the global top 20 IC manufacturers were ASML customers.
In 2002, sales to one customer accounted for EUR 377 million, or 19 percent of net sales.
In 2001, sales to one customer accounted for EUR 202 million, or 13 percent of net sales.
Our sales in 2002 was influenced by the accounting treatment of machines previously
designated as “new technology systems” (see “Critical Accounting Policies”). With the
installed base of such systems at 70 units as of December 31, 2002, ASML had established
a track record of successful installations and decreased time spans between shipment
and full installation at customer sites, enabling these systems to be designated as “proven
technology.” This changed the timing of revenue recognition from customer sign off (full
acceptance) to system shipment. Accordingly, EUR 138 million of revenues of 13 systems
were recognized in 2002 that were deferred as of December 31, 2001. If the current
accounting treatment on these systems had been applied in 2001, this would have resulted
in EUR 138 million of additional sales in 2001 and EUR 138 million lower sales in 2002.
Total net sales for 2001 and 2002 include EUR 19 million in both years relating to the sale
of 17 and 22 used systems, respectively. These systems were reacquired from existing
customers and then resold to other customers utilizing these systems in areas requiring the
less critical resolution capabilities provided by these machines. The increase in the number
of used systems sold was primarily due to our expanding market share in China.
Service sales decreased 14 percent from EUR 253 million in 2001 to EUR 218 million in 2002.
This decrease is mainly due to an increase in the number of customers that opted for in-house
servicing instead of external servicing. The decrease in service sales was partly offset by the
expiration of warranties relating to the high number of systems shipped in 2000 and 2001.
Gross profit as a percentage of net sales increased from 2.0 percent in 2001 to 23.9 percent
in 2002. This increase was primarily due to restructuring costs recorded in 2001 for an amount
of EUR 402.7 million, mainly relating to inventory write-offs, purchase commitments and fixed
assets write-offs. This increase was partially offset by provisions for slow moving inventory of
EUR 78.5 million in the second half of 2002 and by technical development credits (see Notes 1
and 15 to our consolidated financial statements) that had to be repaid in 2003 to Netherlands
granting authorities (2.0 percent negative impact on our margin). Furthermore, gross margin
was also negatively affected (5.0 percent) by lower profit margin generated by new
technologies at the beginning of their product life cycle. We shipped significantly more of
these systems in 2002 compared with 2001. ASML also suffered from price pressure, mainly
on 200-millimeter systems, that negatively affected margin by 2.0 percent. Finally, the margin
was affected positively by 3.0 percent by lower purchase prices for parts and components, of
which 0.5 percent partly was attributable to currency effects relating to the strengthening of
the euro versus the U.S. dollar. In comparison with 2001, utilization of our production facilities
71ASML ANNUAL REPORT 2003
increased, resulting in a one percent margin increase.
Additionally, the gross profit on service sales decreased to 7.3 percent in 2002 from
17.4 percent in 2001. This decrease was due to additional provisions for obsolete service
parts and training system write-downs of EUR 28 million, partially offset by a increase in
the sales margin of spare parts due to lower labor costs.
Lithography order backlog
We started 2002 with an order backlog of 118 systems (117 new systems and 1 used system),
and we received orders for delivery of 261 systems during 2002. Combined with 205 system
sales and 64 order cancellations or push-outs beyond twelve months, this resulted in an order
backlog of 110 systems as of December 31, 2002. Systems sales in 2002 included 13 systems
delivered in 2001 for which revenue was recognized in 2002. The total value of the backlog
as of December 31, 2002 amounted to EUR 1.09 billion, compared with a backlog of
approximately EUR 1.16 billion as of December 31, 2001.
Research and development
Research and development costs decreased from EUR 347 million (21.9 percent of total net
sales) in 2001 to EUR 324 million (16.6 percent of total net sales) in 2002 as a result of more
cost-efficient programs, mainly resulting from the 2001 restructuring. The level of research and
development expenditures reflected our continuing effort to introduce several leading edge
lithography products for 193 nanometer applications and the newest versions of the TWINSCAN
platform, combined with continued investments in next generation 157 nanometer lithography
solutions and EUV and the /850, 248 nanometer high numerical aperture (NA) program.
Research and development credits increased from EUR 16 million in 2001 to EUR 26 million in
2002 due to the increased amount of research and development expenditures that qualified for
credits. Included in the 2002 credits is a postponed credit (EUR 3.5 million) on 2001
expenditures that was subject to certain criteria that were only achieved in 2002.
Selling, general and administrative costs
Selling, general and administrative costs increased by 7.0 percent from EUR 246 million in
2001 to EUR 263 million in 2002, mainly as a result of increased legal fees associated with
patent infringement cases.
Net interest expense
During 2002 net interest expense increased compared to 2001, due to interest charges
resulting from the issuance of our 5.75 percent Convertible Subordinated Notes in October
2001, by a lower balance of cash and cash equivalents and lower average short-term interest
rates.
Income taxes
Income taxes represented 30.1 and 32.7 percent of income before taxes in 2001 and 2002,
respectively. This increase results from a change in distribution of pre-tax loss between
geographical areas. See Note 16 to our consolidated financial statements.
Discontinued operations
Our Thermal business incurred a net loss of EUR 61 million in 2002 compared to a net loss of
EUR 43 million in 2001, mainly due to the industry’s severe downturn. Our Track business
72ASML ANNUAL REPORT 2003
incurred a net loss of EUR 59 million in 2002 compared to a net loss of EUR 21 million in
2001, including total estimated exit costs of EUR 47 million. These exit costs included asset
impairments, inventory write-downs, purchase and other commitment settlements and
employee termination costs. The number of employees laid off under the plan to discontinue
our Track business was 213.
Foreign Exchange Management
We use the euro as our reporting currency in our consolidated financial statements. We are
involved in transactions in currencies that differ from our reporting currency. We have invested
in foreign entities, and as such have translation exposure on the valuation of our foreign
currency denominated investments. We actively manage our exposure to foreign exchange
risks. Further details on our foreign exchange management are disclosed in Note 4 to our
consolidated financial statements. See also Item 3.D. “Risk Factors” and Item 11
“Quantitative and Qualitative Disclosures about Market Risk.”
Principal Differences between IFRS and U.S. GAAP
Beginning in 2005, the European Commission will require companies that are quoted on a
European stock market to publish their financial statements in accordance with International
Financial Reporting Standards (“IFRS”). While we intend to continue publishing U.S. GAAP
financial statements, we also will publish our consolidated financial statements in accordance
with IFRS from January 1, 2005 onwards.
We are currently investigating the possible impact of differences identified between IFRS
and U.S. GAAP. The principal differences currently identified that might affect our
net profit or loss, as well as our shareholders’ equity, relate to the treatment of development
costs, stock option plans, financial instruments, the option feature in our convertible notes
and identifiable intangible assets acquired in our 2001 merger with SVG.
New U.S. GAAP Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”.
SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation”,
to provide alternative methods of transition to the SFAS No. 123 fair value method of
accounting for stock-based employee compensation. In addition, SFAS No. 148 requires
disclosure of the effects of an entity’s accounting policy with respect to stock-based
compensation on reported net income (loss) and earnings per share in annual and interim
financial statements in the summary of significant accounting policies. As permitted under
SFAS No. 148, we adopted only the disclosure provisions of that accounting standard.
See Note 1 to our consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, “Amendment of SFAS No. 133 on Derivative
Instruments and Hedging Activities”. The Statement amends and clarifies financial accounting
and reporting for derivative instruments by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, this statement clarifies the
circumstances under which a contract with an initial net investment meets the characteristics
of a derivative, clarifies when a derivative contains a financing component, amends the
definition of an underlying to conform it to the language used in FIN 45, “Guarantor
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees
73ASML ANNUAL REPORT 2003
of Indebtedness of Others” and amends certain other existing pronouncements.
SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except
as stated below and for hedging relationships designated after June 30, 2003. The adoption
of SFAS No. 149 did not have a material impact on our consolidated results of operations,
financial condition or liquidity.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity”. SFAS No. 150 modifies the accounting
for certain financial instruments that, under previous guidance, issuers could account for as
equity. SFAS No. 150 requires that those instruments be classified as liabilities on the balance
sheet. The adoption of SFAS No. 150 did not have a material impact on our consolidated
results of operations, financial condition or liquidity.
In November 2002, the FASB published FIN 45, “Guarantor’s Accounting and Disclosure
requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”.
FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. FIN 45 also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair value, or market
value, of the obligations it assumes under that guarantee and must disclose that information in
its interim and annual financial statements. The provisions of FIN 45 are required to be applied
on a prospective basis to guarantees issued or modified on January 1, 2003 or after.
The expanded disclosure requirements of FIN 45 are effective for the year ended December
31, 2002 (see Item 5.E. “Off-Balance Sheet Arrangements” and Note 12 to our consolidated
financial statements). Except for the disclosure requirements, adoption of FIN 45 did not have
a material impact on our consolidated results of operations, financial condition or liquidity.
In November 2002, the EITF 00-21 “Revenue Arrangements with Multiple Deliverables” was
released. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. Adoption of EITF Issue No. 00-21 did not
have any material impact on our financial statements.
In January 2003, the “FASB” issued Interpretation No. 46, “Consolidation of Variable Interest
Entities” (“FIN 46”), an interpretation of Accounting Research Bulletin No. 51, “Consolidated
Financial Statements,” which requires the consolidation by a business enterprise of variable
interest entities if the business enterprise is the primary beneficiary. The FASB has amended
FIN 46, now known as FIN 46 Revised December 2003 (“FIN 46R”). The requirements of
FIN 46 or FIN 46R are effective to those entities that are considered to be special-purpose
entities no later than as of the end of the first reporting period that ends after December 15,
2003. We adopted FIN 46R as we are party to a transaction involving a variable interest entity,
that is a special-purpose entity, relating to the lessor of the Veldhoven headquarters building
that has been completed in 2003. See also Item 5.E. “Off Balance Sheet Arrangements”.
B. Liquidity and Capital Resources
Financial Condition, Liquidity and Capital Resources
The following discussion and analysis of financial condition should also be viewed in the
74ASML ANNUAL REPORT 2003
context of the risks affecting our business strategy, described in Item 3.D. “Risk Factors.”
ASML’s balance of cash and cash equivalents amounted to EUR 669 million and
EUR 1,028 million as of December 31, 2002 and 2003, respectively.
Net cash flows provided by operating activities were EUR 509 million in 2003 compared
to EUR 54 million cash used in operating activities in 2002. The primary reason of the cash
provided by operating activities in 2003 has been changes in working capital, including
accounts receivable, inventories and current assets. Net accounts receivable decreased from
EUR 557 million to EUR 314 million. ASML’s ratio of accounts receivable to total net sales was
28.4 percent and 20.4 percent in 2002 and 2003, respectively. Gross inventories decreased by
20.4% from December 31, 2002 to December 31, 2003. The decrease reflects our continuing
efforts to reduce our inventory level by means of cycle time reduction and cost of goods
reduction programs.
The provision for obsolescence decreased by 25% from December 31, 2003 to December 31,
2002, principally reflecting scrapping of inventories. In 2002 and 2003, ASML paid
EUR 4 million and EUR 12 million in taxes, respectively. In 2003, ASML received EUR 176
million tax refund from the Dutch tax authorities, which is allowed under Dutch tax law.
See Note 16 to our consolidated financial statements.
Net cash used in investing activities was EUR 80 million in 2002 and EUR 26 million in 2003.
The 2002 figure reflected the further expansion of production facilities during that year as well
as expenditure in own use equipment (e.g., prototypes, training systems, and demonstration
systems), to support sales, manufacturing and demonstration capabilities relating to new
300 millimeter product lines. The 2003 figures mainly relate to expenditures in own use
equipment.
Net cash used in financing activities in 2003 amounted to EUR 68 million. The 2003 amount
primarily reflects the complete redemption and repurchase of USD 520 million of 4.25 percent
Convertible Subordinated Notes due 2004, partially offset by the issuance of EUR 380 million
of 5.5 percent Convertible Subordinated Notes due 2010. In 2002, proceeds from financing
activities amounted to EUR 21 million mainly reflecting EUR 27 million in proceeds from the
exercise of stock options and EUR 5 million repayment of long term debts.
On December 31, 2003, our principal sources of liquidity consisted of EUR 1,028 million of
cash and cash equivalents, and EUR 288 million of available credit facilities. For further details
regarding our credit facilities, see Note 11 to our consolidated financial statements. In addition
to cash and available credit facilities, we may from time to time raise additional capital in debt
and equity markets. Our liquidity is affected by many factors, some of which are based on the
normal ongoing operations of the business, and other of which relate to the uncertainties of
global economies and the semiconductor and the semiconductor equipment industries.
Although our cash requirements will fluctuate based on the timing and extent of these factors,
we believe that cash generated from operations, together with the liquidity provided by
existing cash balances, will be sufficient to satisfy our liquidity requirements for the next
twelve months. In 2004, we have no repayment obligations on our outstanding convertible
notes. We expect capital expenditures in 2004 to range between EUR 75 million and
EUR 85 million. In addition, we maintain for the next twelve months operating lease
75ASML ANNUAL REPORT 2003
commitments for an amount of approximately EUR 47 million and certain open inventory
purchase commitments for an amount of approximately EUR 300 million with our suppliers
to ensure a smooth and continuous supply chain for key components.
With respect to the announcement in July 2003 of a workforce reduction by approximately
550 positions worldwide, of which the majority is planned in the Netherlands, the Board of
Management and the Dutch Works Council are nearing the completion of a joint study on
implementing these workforce reductions in the Netherlands. Consequently, the Dutch workforce
reduction has been delayed, and accordingly, the results of cost reductions have been
delayed. A restructuring provision of approximately EUR 15 million relating to this workforce
reduction is recorded in our statement of operations for the year ended December 31, 2003.
In 2006, we have repayment obligations, amounting to USD 575 million, on our 5.75 percent
Convertible Subordinated Notes due 2006 issued in October 2001, assuming no conversions
occur. These notes are convertible into 30,814,576 ordinary shares at USD 18.66 (EUR 14.77)
per share at any time prior to maturity. At any time on or after October 22, 2004, the notes are
redeemable at the option of ASML, in whole or in part, at 100 percent of its principal amount,
together with accrued interest, provided that our shares close above 130 percent of the
conversion price for twenty trading days out of a thirty-day period. During 2003 none of the
notes were converted into ordinary shares. We have additional repayment obligations in 2010,
amounting to EUR 380 million, on our 5.50 percent Convertible Subordinated Notes due 2010
issued in May 2003, assuming no conversions occur. These notes are convertible into an
aggregate of 26,573,426 ordinary shares at a conversion price of EUR 14.30 per share,
subject to adjustment, at any time prior to maturity. Unless previously converted, the notes
mature on May 15, 2010. We currently intend to fund our future repayment obligations with
primarily cash on hand and cash generated through operations. In this respect, we launched
a working capital improvement program in 2002 which is continued in 2003 and will continue
in 2004, focusing on inventory control, early collection of receivables and effective
management of payments, in order to further strengthen our cash position. The description of
our long-term debt, lines of credit and borrowing arrangements is provided in Note 11 to our
consolidated financial statements. See also Item 3.D. “Risk Factors.”
Our contractual obligations and commercial commitments are disclosed in further detail in
Item 5.F. “Tabular Disclosure of Contractual Obligations” and Note 12 to our consolidated
financial statements.
A discussion of our funding, treasury policies and currencies in which cash and cash
equivalents are held and long-term debt and borrowing arrangements are included by
reference to Notes 4 and 11 to our consolidated financial statements.
C. Research and Development, Patents and Licenses
Research and Development
See Item 4.B. “Business Overview, Research and Development” and Item 5.A. “Operating
Results”.
76ASML ANNUAL REPORT 2003
Intellectual Property Matters
See Item 3.D. “Risk Factors, Defending Against Intellectual Property Claims by Others Could
Harm Our Business” and Item 4.B. “Business Overview, Intellectual Property”.
D. Trend Information
The year 2003 was an unprecedented third consecutive year in the worst period of contraction
in the history of the global semiconductor industry.
Over the last three months of 2003, the order intake has shown considerable strength for
systems to be shipped in the first half of 2004. Approximately 80 percent, or 100 systems,
of our backlog as of December 31, 2003 is expected to be shipped in the first half of 2004.
However, the visibility of our sales level for the second half of 2004 is still unclear.
Therefore, we cannot give a forecast of our expected level of sales for the full year 2004.
Our customers are currently still cautious on long-term orders.
The following table sets forth our backlog of systems as of December 31, 2002 and 2003.
As of December 31 2002 2003
Backlog sales of new systems (units) 103 103
Backlog sales of used systems (units) 7 21
Backlog sales of total systems (units) 110 124
Value of backlog new systems (Eur million) 1,077 946
Value of backlog used systems (Eur million) 12 47
Value of backlog of total systems (Eur million) 1,089 993
Historically, orders have been subject to cancellation or delay by the customer. Due to
possible customer changes in delivery schedules and to cancellation of orders, our backlog
at any particular date is not necessarily indicative of actual sales for any succeeding period.
Based upon our backlog as of December 31, 2003, we expect continued growth in gross
margin in the first half of 2004. We believe that a further increase in gross margin can be
achieved by further working on increasing the value of ownership of our systems and on
programs focusing on the reduction of our costs of goods sold and by an increase in number
of systems sold.
For 2004, we expect selling, general and administrative expenses, ranging between EUR 50-55
million per quarter, dependent on the level of legal fees associated with patent infringement cases.
For 2004, we expect a further decrease in research and development expenditures and
anticipate research and development costs to range between EUR 65-70 million per quarter.
In July 2003, we announced further restructuring measures to reduce costs company-wide
while lowering the break-even point and increasing flexibility. We plan to reduce our workforce
by approximately 550 positions worldwide of which the majority planned in the Netherlands.
The Board of Management and the Dutch Works Council are nearing the completion of a joint
study on implementing these workforce reductions in the Netherlands.
77ASML ANNUAL REPORT 2003
Consequently, the Dutch workforce reduction has been delayed, and accordingly, the results
of cost reductions have been delayed. See Item 6.D. “Employees”.
E. Off- Balance Sheet Arrangements
We have various contractual obligations, some of which are required to be recorded as
liabilities in our consolidated financial statements, including long- and short-term debt. Others,
namely operating lease commitments and purchase obligations, are not generally required to
be recognized as liabilities on our balance sheet but are required to be disclosed.
Variable Interest Entities
Several operating leases for our buildings contain a purchase option. In December 2003,
the FASB issued FIN 46R, “Consolidation of Variable Interest Entities”. Under FIN 46R an
enterprise must consolidate a variable interest entity if that enterprise has a variable interest
(or combination of variable interests) that will absorb a majority of the entity’s expected losses
if they occur, receive a majority of the entity’s expected residual returns if they occur, or both.
For each of the leases for our buildings, we have concluded that we are not the primary
beneficiaries to the expected losses or to the expected residual returns or to both.
We are party to a transaction involving a variable interest entity relating to the lessor of the
Veldhoven headquarters building that has been completed in 2003. Total assets of the variable
interest entity amount to approximately EUR 54 million and are funded through:
• variable interest entity’s equity of EUR 1.9 million;
• straight loans granted by the shareholders of the variable interest entity of EUR 12.3 million,
partly redeemable over 15 years and quarterly interest-bearing;
• a third party loan of EUR 34.9 million, partly redeemable over 15 years and quarterly
interest-bearing; and
• a subordinated loan provided by ASML of EUR 5.4 million.
The lease will expire in 2018. We have an option to purchase the property, at a predetermined
price scheme, throughout the term of the lease. The purchase option at the end of the lease
term amounts to EUR 24.5 million. In accordance with FIN 46R we have concluded that we are
not the primary beneficiary in the lessor entity to the expected losses nor to the expected
residual returns nor to both. As a result we did not consolidate the specific assets and
liabilities of this variable interest entity in our financial statements.
Purchase Obligations
We enter into purchase commitments with vendors in the ordinary course of business to ensure
a smooth and continuous supply chain for key components. Purchase obligations include medium
to long-term purchase agreements. These contracts differ and may include certain restrictive
clauses. Any identified losses that would result from purchase commitments that are expected
to be forfeited are provided for in our financial statements. As of December 31, 2003, we had
purchase commitments for a total amount of approximately EUR 335 million, which are not
recorded on our balance sheet. In our negotiations with suppliers we continuously seek to align
our purchase commitments with our business objectives. See also Item 5.F. “Tabular Disclosure
of Contractual Obligations”.
78ASML ANNUAL REPORT 2003
Item 6
Directors, Senior
Management and
Employees
Other Off-Balance Sheet Arrangements
We have certain additional commitments and contingencies that are not recorded on our balance
sheet but may result in future cash requirements. In addition to the operating lease commitments
and the purchase obligations, these off-balance sheet arrangements consist of product warranties,
a call option granted to a third party to acquire our optics business at fair value and guarantees
of subsidiary’s debt to a third party.
We provide guarantees to third parties in connection with transactions entered into by our
subsidiaries in the ordinary course of business: These include bank loans reflected in Note 11
of our consolidated financial statements.
F. Tabular Disclosure of Contractual Obligations
Our contractual obligations as of December 31, 2003 can be summarized as follows:
Total Less than 1-3 3-5 After 5
1 year years years years
Long Term Debt 852,807 0 468,839 2,658 381,310
Operating Lease Obligations 386,112 47,005 72,448 67,699 198,960
Purchase Obligations 335,115 300,170 34,945 0 0
Total Contractual obligations 1,574,034 347,175 576,232 70,357 580,270
G. Safe Harbor
See “Special Note regarding Forward-Looking Statements”.
A. Directors and Senior Management
The members of our Supervisory Board and our Board of Management are as follows:
Name Title Date of Birth Member Since Term Expires
Henk Bodt Chairman of the April 30, 1938 January 1995 2004
Supervisory Board
and Member of the
Audit and Remuneration
Committees
Jan A. Dekker Member of the May 10, 1939 April 1997 2006
Supervisory Board
and Member of the
Audit Committee
Peter H. Grassmann Member of the November 21, 1939 April 1996 2006
Supervisory Board
79ASML ANNUAL REPORT 2003
Name Title Date of Birth Member Since Term Expires
Syb Bergsma Member of the October 6, 1936 April 1998 2004
Supervisory Board
and Chairman of the
Audit Committee and
Member of the
Remuneration Committee
Jos W.B. Westerburgen Member of the June 24, 1942 March 2002 2005
Supervisory Board
and Chairman of the
Remuneration Committee
Michael J. Attardo Member of the April 12, 1941 May 2001 2005
Supervisory Board
and Member of the
Remuneration Committee
Doug J. Dunn President and Chief May 5, 1944 April 1999 N/A 1,2
Executive Officer and
Chairman of the Board
of Management
Stuart K. McIntosh Executive Vice August 31, 1944 April 2001 N/A 2
President Operations,
President of Lithography
and Member of the
Board of Management
Peter T.F.M. Wennink Executive Vice May 30, 1957 July 1999 N/A 2
President, Chief
Financial Officer and
Member of the Board
of Management
Martin A. van den Brink Executive Vice May 21, 1957 July 1999 N/A 2
President Marketing
& Technology and
Member of the Board
of Management
David P. Chavoustie Executive Vice May 17, 1943 April 2000 N/A 2
President Sales and
Member of the Board
of Management
1 On January 15, 2004, we announced that Mr. Dunn has advised the Supervisory Board and Board ofManagement that he plans to retire before the end of 2004.
2 There are no specified terms for members of the Board of Management.
80ASML ANNUAL REPORT 2003
Henk Bodt
Jan A. Dekker
Peter
H. Grassmann
Syb Bergsma
Jos W.B.
Westerburgen
Michael J. Attardo
Doug J. Dunn
Director and Officer Biographies
Mr. Bodt was appointed as Chairman of our Supervisory Board in 1995. Mr. Bodt is a former
Executive Vice President of Philips. In addition to other positions, including Chairman and
Chief Executive Officer of the Consumer Electronics Division, he also served on the Board
of Management of Philips and on the Group Management Committee of Philips. He currently
serves on the Supervisory Boards of DSM N.V., Delft Instruments N.V. and Neo-Post SA.
Mr. Dekker has served on our Supervisory Board since 1997. Mr. Dekker is a former Chief
Executive Officer of TNO. He currently serves on the Supervisory Boards of Gamma Holding
N.V. and Koninklijke BAM-NBM N.V.
Mr. Grassmann has served on our Supervisory Board since 1996. Mr. Grassmann is a former
President and Chief Executive Officer of Zeiss. He currently serves on the Supervisory Boards
of Gambro B.V., Aradex AG, Febit AG, IONITY AG, and of the Senate of the Max-Planck-
Society. He is a member of the Advisory Board of EQT private equity funds Gmbh.
Mr. Bergsma has served as a member of our Supervisory Board since 1998. Mr. Bergsma
is a former Executive Vice President Financial Affairs of Akzo Nobel N.V. Mr. Bergsma serves
currently as the Chairman of the Supervisory Boards of UPM Holding B.V., Generali
Verzekeringsgroep N.V., and Van der Moolen Holding N.V. Mr. Bergsma also serves as Vice
Chairman on the Supervisory Boards of European Assets Trust N.V. In addition, Mr. Bergsma
is the Chairman of the Boards of Stichting Continuïteit Numico and Stichting
Administratiekantoor Preferente Financieringsaandelen Ahold. He also serves on the Boards of
Stichting Preferente Aandelen Wolters Kluwer and Stichting Administratiekantoor Océ.
Mr. Westerburgen was appointed to our Supervisory Board in March 2002. Mr. Westerburgen
has extensive experience in the field of corporate law and tax. Mr. Westerburgen is former
Company Secretary and Head of Tax of Unilever, and a former member of the Peters
Committee on Corporate Governance in the Netherlands. Mr. Westerburgen currently serves
as a member of the Supervisory Board of Unilever Nederland B.V., and is also a member of
the Board of the Association Aegon.
Mr. Attardo was appointed to our Supervisory Board during 2001. He is the former President and
CEO of IBM Microelectronics and a former non-executive director of Silicon Valley Group, Inc.
Mr. Dunn was appointed to our Board of Management in 1999 and has served as our
President, Chief Executive Officer and Chairman of the Board of Management since January
2000. Prior to joining the Board of Management, Mr. Dunn served as Vice-Chairman of our
Supervisory Board from 1995 until 1997. Previously, Mr. Dunn also served on the Board of
Management of Philips as CEO of the Consumer Electronics Division, as a member of the
Group Management Committee of Philips and as a Chairman and CEO of the Management
Committee of the Philips Semiconductors Division and, from 1969 to 1980, held numerous
positions at Motorola and the General Electric Company. Mr. Dunn is currently a non-executive
member of the board of ARM Holdings PLC and Sendo Holdings PLC. He is also on the
Supervisory Board of STMicroelectronics N.V. In addition, Mr. Dunn is on the Board of MEDEA+.
81ASML ANNUAL REPORT 2003
Stuart K. McIntosh
Peter T.F.M. Wennink
Martin A. van den
Brink
David P. Chavoustie
Mr. McIntosh was appointed as Executive Vice President Operations and President
Lithography Division during 2000 and was appointed as a member of our Board of
Management effective April 1, 2001. Prior to that he served as the Executive Vice President
and Chief Operating Officer of Philips Semiconductors. He also serves on the Advisory Board
of SEMI North America.
Mr. Wennink was appointed as Executive Vice President and Chief Financial Officer of ASML
in 1999. Mr. Wennink has an extensive background in finance and accounting. Prior to his
employment with ASML, Mr. Wennink worked as a partner at Deloitte & Touche, specializing
in the high technology industry with an emphasis on the semiconductor equipment industry.
Mr. Wennink is a member of the Netherlands Institute of Registered Accountants.
Mr. Wennink is currently on the Supervisory Board of Bank Insinger de Beaufort N.V.
Mr. van den Brink was appointed as Executive Vice President Marketing & Technology during
1999. Before then, he served as Vice President Technology since 1995. Mr. van den Brink
was appointed as a member of our Board of Management in July 1999.
Mr. Chavoustie has served as Executive Vice President Sales since 1998. He was appointed
as a member of our Board of Management in April 2000. Before then, he served as
Vice President Worldwide Sales of Vantis Corporation and as Vice President/General Manager
of the Embedded Processes Division of Advanced Micro Devices. Mr. Chavoustie currently
also serves on the Board of Directors of Three-Five Systems, Inc. and Brillian Corporation.
B. Compensation
For details on compensation paid to or accrued for our members of the Board of Management
and our members of the Supervisory Board, see Note 18 to our consolidated financial statements.
For details on options granted to, and pension benefits of, the members of the Board of
Management, see Note 18 to our consolidated financial statements.
Bonus and Profit-sharing plans
For details on our bonus and profit sharing plans for our employees, see Note 13 to our
consolidated financial statements.
Pension plans
For details on our pension plans for our employees, see Note 13 to our consolidated financial
statements.
C. Board Practices
Board Practices
We endorse the importance of good corporate governance, in which independence,
accountability and transparency are the most significant elements. Within the framework of
corporate governance, it is important that a relationship of trust exists between the Board of
Management and the Supervisory Board on the one hand and shareholders on the other.
82ASML ANNUAL REPORT 2003
In addition to the exchange of ideas at the General Meeting of Shareholders, other important
forms of communication include the publication of our annual and quarterly financial results.
In addition, we pursue a policy of active communication with our shareholders. Our corporate
governance structure is intended to:
• provide shareholders with regular, reliable and relevant transparent information regarding
our activities, structure, financial condition, performance and other information,
including information on our social, ethical and environmental records and policies;
• apply high quality standards for disclosure, accounting and auditing; and
• apply stringent rules with regard to insider securities trading.
ASML is incorporated under Netherlands law and has a two-tier board structure where
independent, non-executive members serve on the Supervisory Board, which in turn
supervises and advises the members of the Board of Management in performing their
management tasks. Supervisory Board members are prohibited from serving as officers
or employees of ASML, and members of the Board of Management cannot serve on the
Supervisory Board.
Responsibility for the management of ASML lies with the Board of Management.
The Supervisory Board monitors the Board of Management and the general course of
corporate affairs. The Board of Management has a duty to keep the Supervisory Board
informed, consult with the Supervisory Board on important matters and submit certain
important decisions to the Supervisory Board for its prior approval. The supervision of the
Board of Management by the Supervisory Board includes (I) achievement of the Company’s
objectives, (II) corporate strategy and risk inherent to the business activities, (III) the structure
and operation of the internal risk management and control systems, (IV) the financial reporting
process and (V) compliance with the legislation and regulations.
Members of the Board of Management are appointed by the Supervisory Board and serve
until voluntary retirement, or suspension or dismissal by the Supervisory Board, in the case
of dismissal, after consultation with the General Meeting of Shareholders. Appointments to
the Supervisory Board are made by the Supervisory Board itself, subject to certain rights of
objection retained by the General Meeting of Shareholders and the Works Council. Members of
the Supervisory Board generally serve for a term of four years from the date of their appointment,
or a shorter period as set forth in the rotation schedule as adopted by the Supervisory Board,
and may be re-appointed by, and serve at the discretion of, the Supervisory Board.
The Supervisory Board has an Audit Committee and a Remuneration Committee. Members of
these committees are appointed from and among the Supervisory Board members.
Members of the Board of Management and Supervisory Board, as well certain senior
management members, are insured under the ASML’s Directors and Officers Insurance Policy.
Although the insurance policy provides for a wide coverage, our directors and officers may
occur additional uninsured liabilities. ASML has indemnified its Board of Management and
Supervisory Board against any claims arising in connection with their position as director and
officer of the Company, provided that such claim is not attributable to willful misconduct, or
intentional recklessness.
83ASML ANNUAL REPORT 2003
Corporate Governance Developments
ASML continuously monitors and assesses applicable corporate governance rules, including,
recommendations, and initiatives regarding principles of corporate governance. These include
those that have been developed in the United States both by NASDAQ National Market
(“Nasdaq”) and by the SEC pursuant to the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”)
some of which already are applicable and some of which will have to be implemented by
ASML as a foreign issuer over the next two years.
On March 10, 2003, the Dutch government commissioned a committee known as the
Tabaksblat Committee to conduct a review of corporate governance in the Netherlands.
The Tabaksblat Committee issued its definitive report “The Dutch Corporate Governance
Code” (the “Code”) on December 9, 2003, which will come into force with effect from January
1, 2004. Dutch listed companies are required to apply the Code, unless circumstances justify
a deviation therefrom. Although a full report on compliance with the Code is required in 2005,
the Tabaksblat Committee recommends that companies highlight in their statutory annual
report 2003, how the company is going to implement the Code and which difficulties it might
encounter while doing so, and discuss this in their 2004 annual meeting of shareholders.
Pursuant to the Code’s recommendations, ASML provides a separate chapter on corporate
governance, which is included in ASML’s annual report over the financial year 2003. The Code
contains recommendations with regard to corporate governance, including the following topics:
• to strengthen the role of the Supervisory Board and its committeesand to increase
independence, quality and expertise;
• to strengthen the role of the shareholders with respect to control on the functioning of the
Board of Management and the Supervisory Board, as well as with respect to nomination
and remuneration of members of the Board of Management and the Supervisory Board;
• to facilitate and stimulate shareholders to use their voting power and to actively participate
in the general shareholders meeting; and
• to define the role of the external auditor vis-à-vis the Supervisory Board as its principal contact.
The Company is familiarizing itself with, and when required implements, the Dutch Corporate
Governance Code and the changes to the U.S. corporate governance rules based on the
Sarbanes-Oxley Act, and subsequent SEC and Nasdaq rules that have been issued pursuant
thereto.
Audit Committee
The Audit Committee is composed of three members of the Supervisory Board. Our external
auditor, our Chief Executive Officer, our Chief Financial Officer and our Corporate Controller
may also attend the meetings of the Audit Committee.
The Audit Committee assists the Supervisory Board in:
• overseeing the integrity of our financial statements and related non-financial disclosure;
• verifying the qualifications, independence and performance of the external auditor of our
financial statements; and
• overseeing the integrity of our systems of disclosure controls and procedures and the
system of internal controls over financial reporting.
84ASML ANNUAL REPORT 2003
During the year 2003, the Audit Committee has met to review our quarterly earnings
announcements and our audited annual consolidated financial statements, to discuss the
system of internal controls over financial reporting and related audit findings, to approve
the external audit plan and related audit fees and to pre-approve any non-audit services
to be rendered by our external auditor. The current members of our Audit Committee are
Syb Bergsma (chairman), Henk Bodt and Jan Dekker. The members of the Audit Committee
are all independent, non-executive members of the Supervisory Board. The Supervisory Board
has determined that Syb Bergsma qualifies as the Audit Committee financial expert pursuant
to Section 407 of the Sarbanes-Oxley Act and the rules promulgated thereunder.
Remuneration Committee
The Remuneration Committee has prepared a remuneration policy for the Board of Management,
which will be submitted to the 2004 General Shareholders Meeting for discussion and adoption.
The Remuneration Committee recommends, reviews and authorizes specific compensation
and benefits levels for Board of Management members. Furthermore, the Remuneration
Committee reviews and authorizes the general compensation and benefits programs for
the Board of Management. The current members of our Remuneration Committee are
Jos Westerburgen (chairman), Henk Bodt, Syb Bergsma and Michael Attardo.
The Remuneration Committee prepares and the Supervisory Board establishes ASML’s
general compensation philosophy for members of the Board of Management, and oversees
the development and implementation of compensation programs for members of the Board of
Management. The Remuneration Committee reviews and proposes to the Supervisory Board
corporate goals and objectives relevant to the compensation of members of the Board of
Management, including the Chief Executive Officer. The Committee further evaluates the
performance of members of the Board of Management in view of those goals and objectives,
and makes recommendations to the Supervisory Board on the compensation levels of the
members of the Board of Management based on this evaluation.
In proposing to the Supervisory Board the actual remuneration elements and levels applicable
to the members of the Board of Management, the Remuneration Committee considers,
among other factors, the remuneration policy, the desired levels of and emphasis on particular
aspects of the ASML’s short and long-term performance and its current compensation and
benefits structures and levels benchmarked against the relevant markets. External
compensation survey data and, where necessary, external consultants are used to benchmark
ASML’s remuneration levels and structures.
Disclosure Committee
ASML has a Disclosure Committee to ensure compliance with applicable disclosure
requirements arising under United States and Dutch law. The Disclosure Committee reports
to and assists our Chief Executive Officer and Chief Financial Officer in the maintenance and
evaluation of disclosure controls and procedures. The Audit Committee is kept informed about
the outcome of the Disclosure Committee meetings. The Disclosure Committee gathers all
relevant financial and non-financial information and assesses materiality, timeliness and
necessity for disclosure of such information. The Disclosure Committee comprises various
85ASML ANNUAL REPORT 2003
members of senior management. Furthermore, members of the Disclosure Committee are in
close contact with our external legal counsel and our external auditor.
During the year 2003, the Disclosure Committee met to review our quarterly earnings
announcements, our audited annual consolidated financial statements and other public
announcements containing financial information we made. In addition, specific meetings were
held to assess disclosure controls and procedures and internal controls over financial
reporting. In order to prepare this assessment, an Internal Control Committee was formed,
comprising three members of the Disclosure Committee.
Exemptions from Certain Nasdaq Corporate Governance Rules
Nasdaq rules provide that Nasdaq may provide exemptions from the Nasdaq corporate
governance standards to a foreign issuer when those standards are contrary to a law,
rule or regulation of any public authority exercising jurisdiction over such issuer or contrary to
generally accepted business practices in the issuer’s country of domicile. ASML has received
from Nasdaq exemptions from certain Nasdaq corporate governance standards that are
contrary to the laws, rules, regulations or generally accepted business practices of
The Netherlands. These exemptions and the practices followed by ASML are described below:
• ASML is exempt from Nasdaq’s quorum requirements applicable to meetings of ordinary
shareholders. In keeping with Netherlands law and Netherlands generally accepted business
practice, ASML’s Articles of Association provide that there are no quorum requirements
generally applicable to General Meetings of Shareholders.
• ASML is exempt from Nasdaq’s requirements regarding the solicitation of proxies and
provision of proxy statements for meetings of shareholders. ASML does not solicit proxies
or prepare proxy statements for General Meetings of Shareholders. Netherlands law does
not have a regulatory regime for the solicitation of proxies and the solicitation of proxies is
not a generally accepted business practice in The Netherlands.
• ASML is exempt from Nasdaq’s requirements that the establishment of, or material
amendments to, stock option or purchase plans and other equity compensation
arrangements pursuant to which options or stock may be acquired by directors, officers or
employees be approved by shareholders. ASML’s Articles of Association provide that the
Company’s Board of Management may issue shares, including share options, only if it has
been granted the general authority to do so by the General Meeting of the Shareholders.
Once this grant of authority has been obtained, each issuance of shares must then be
approved by ASML’s Supervisory Board and by the Meeting of the Priority Shareholders.
D. Employees
As of December 31, 2003, we had 5,059 employees in our continuing operations, including
temporary contract employees, employed primarily in product development activities at our
headquarters in Veldhoven. As of December 31, 2001, and December 31, 2002, the total
number of employees in continued operations was 6,039 and 5,971, respectively. For a more
detailed description of employee information, see Notes 13 and 19 to to our consolidated
financial statements, which are incorporated herein by reference. We rely on our ability to
vary the number of temporary employees to respond to fluctuating market demand for our
86ASML ANNUAL REPORT 2003
Item 7
Major
Shareholders
and Related Party
Transactions
products. The average number of temporary employees during 2003 was 203 compared to
263 during 2002.
Our future success will depend on our ability to attract, train, retain and motivate highly
qualified employees, who are in great demand. We are particularly reliant for our continued
success on the services of several key employees, including a number of systems development
specialists with advanced university qualifications in engineering, optics and computing.
With the decision to discontinue our Track business and to sell our Thermal business,
we started reducing our workforce at the end of 2002. Furthermore, to manage the effects
of the industry’s continuing downturn during 2002, we reduced our lithography-related
workforce by approximately 700 positions worldwide and, in July 2003 announced a further
workforce reduction by approximately 550 positions worldwide.
ASML Netherlands B.V., our operating subsidiary in the Netherlands, has a Works Council,
as legally required. A Works Council is a representative body of the employees of
a Dutch company elected by the employees. The Board of Management of any Dutch
company that runs an enterprise with a Works Council must seek the non-binding advice of
the Works Council before taking certain decisions with respect to the company, such as those
related to a major restructuring, a change of control, or the appointment or dismissal of a
member of the Board of Management. Other decisions directly involving employment matters
that apply either to all employees, or certain groups of employees, such as those affecting
employee compensation systems, or pension or profit sharing plans, may only be taken with
the Works Council’s approval. Absent such prior approval, the decision may nonetheless be
taken with the prior approval of the District Court.
With respect to the announcement in July 2003 of a workforce reduction by approximately
550 positions worldwide, of which the majority is planned in the Netherlands, the Board of
Management and the Dutch Works Council are nearing the completion of a joint study on
implementing these workforce reductions in the Netherlands. Consequently, the Dutch
workforce reduction has been delayed.
See Note 19 to our consolidated financial statements for a breakdown of our employees by
segment and function.
E. Share Ownership
Information with respect to share ownership of members of our Supervisory Board and Board
of Management is included in Item 7 “Major Shareholders and Related Party Transactions”
and Note 18 to our consolidated financial statements, which are incorporated herein by
reference.
A. Major Shareholders
The following table sets forth the total number of ordinary shares owned by each shareholder
whose beneficial ownership of ordinary shares exceeds 5 percent of the ordinary shares
issued and outstanding, as well as the ordinary shares owned by the members of the
87ASML ANNUAL REPORT 2003
Supervisory Board and members of the Board of Management (which includes those persons
specified in Item 6 “Directors, Senior Management and Employees”), as a group, as of
December 31, 2003:
Identity of Person or Group Amount Owned Percent of Class
Capital Group International, Inc1 28,455,070 5.9%
FMR Corp.2 58,304,695 12.1%
Members of ASML’s Supervisory Board and
Board of Management, as a group (7 persons)3 1,811,662 *
* Less than 1 percent.1 Based solely on the Schedule 13-G/A jointly filed by Capital Group International, Inc. with the Commission on
November 13, 2003.2 Based solely on the Schedule 13-G/A filed by FMR Corp. with the Commission on February 13, 2003.3 Five members of our Board of Management own 1,724,260 options to purchase ASML shares. See Note 18 to
our consolidated financial statements for information on options held by members of our Board of Managementon an individual basis. Two members of our Board of Management own 49,680 of our outstanding shares. Two members of the Supervisory Board hold 37,722 of our outstanding shares or options on shares. None of the other members of the Supervisory Board hold any of our outstanding shares or options on shares.
Our major shareholders do not have voting rights different from other shareholders.
Until our public offering in 1995, in which Philips’ ownership was reduced to approximately
56.7 percent, we were a wholly-owned subsidiary of Philips. In public offerings in March 1996,
February 1997 and June 2000, Philips’ ownership was further reduced to approximately
35.3 percent, 23.9 percent and 7.2 percent, respectively. Philips subsequently lowered its
share ownership to below 5 percent as of December 31, 2003.
We do not issue share certificates, except for registered New York Shares.
For more information see Item 10.B. “Memorandum and Articles of Association.”
Obligations of Shareholders to Disclose Holdings under
Netherlands Law
Holders of our shares may be subject to reporting obligations under the Netherlands 1996 Act
on Disclosure of Holdings in Listed Companies (the “Major Holdings Act”) and the Netherlands
1995 Act on the Supervision of the Securities Trade (the “Securities Trade Act”).
The Major Holdings Act applies to any person or entity that, directly or indirectly, acquires
or disposes of an interest in the voting rights and/or the capital of a public limited company
incorporated under the laws of the Netherlands that is officially listed on a stock exchange
within the European Union (the “EU”). Disclosure is required when, as a result of an acquisition
or disposal, the percentage of voting rights or capital interest acquired or disposed of by
a person or an entity reaches, exceeds or falls below 5, 10, 25, 50 or 66-2/3 percent.
With respect to ASML, the Major Holdings Act would require any person or entity whose
interest in the voting rights and/or capital of ASML reached, exceeded or fell below those
percentage interests to notify in writing both ASML and the Netherlands Authority for the
Financial Markets (Autoriteit Financiële Markten, the “AFM”) immediately after the acquisition
or disposal of the triggering interest in ASML’s share capital.
On July 3, 2003, a draft bill to amend the Major Holding Act was submitted to the Second
Chamber of the Dutch Parliament. According to the Explanatory Notes to the proposed bill,
88ASML ANNUAL REPORT 2003
it is anticipated that the following percentage ranges, which trigger a notification obligation,
will be introduced to replace the existing percentages: 0 percent to less than 5 percent,
5 percent to less than 10 percent, 10 percent to less than 15 percent, 15 percent to less
than 20 percent, 20 percent to less than 25 percent, and 25 percent or more. Under the
proposed bill, above 25 percent, all direct or indirect transactions in our share capital or voting
rights must be reported.
For the purpose of calculating the percentage of capital interest or voting rights, the following
interests must be taken into account: shares (or depositary receipts for shares) (I) directly held
(or acquired or disposed of) by any person, (II) held (or acquired or disposed of) by such
person’s subsidiaries or by a third party for such person’s account or by a third party with
whom such person has concluded an oral or written voting agreement, and (III) which such
person, or any subsidiary or third party referred to above, may acquire pursuant to any option
or other right held by such person (or acquired or disposed of, including, but not limited to,
on the basis of convertible bonds). Special rules apply to the attribution of shares (or depositary
receipts for shares) which are part of the property of a partnership or other community of
property. A holder of a pledge or right of usufruct in respect of shares (or depositary receipts
for shares) can also be subject to the reporting obligations, if such person has, or can acquire,
the right to vote on the shares or, in case of depositary receipts, the underlying shares.
If a pledgee or usufructarian acquires such (conditional) voting rights, this may trigger the
reporting obligations for the holder of the shares (or depositary receipts for the shares).
In addition, pursuant to the Securities Trade Act and a decree based thereon, a shareholder
who directly or indirectly holds a capital interest of more than 25 percent in our capital must,
by means of a standard form, within ten days after the month in which the transaction occurs,
notify the AFM of such transaction in our common shares or securities the value of which is
co-dependent on the value of our ordinary shares (including, without limitation, an acquisition
or disposal of our shares or depositary receipts issued for our shares or convertible bonds
issued by us). If that shareholder is a legal entity and not an individual, the obligations under
the Securities Trade Act also apply to members of its management and supervisory boards. In
addition, these obligations apply to the following persons related to such 25 percent
shareholder (if the 25 percent shareholder is not a legal entity): (I) spouses, (II) relations by
blood or affinity to the first degree and other persons who share a household with these
persons, and (III) relations by blood or affinity to the first degree who do not share a
household with these persons but hold at least 5 percent of our shares (or depositary receipts
for our shares) in our capital or will obtain this percentage through the transaction.
The AFM keeps a public registry of and publishes all notifications made pursuant to the Major
Holdings Act and the Securities Trade Act.
Non-compliance with the reporting obligations under the Major Holdings Act or the Securities
Trade Act could lead to criminal fines, administrative fines, imprisonment or other sanctions.
In addition, non-compliance with the reporting obligations under the Major Holdings Act may
lead to civil sanctions, including suspension of the voting rights relating to the shares held
by the offender, or the shares underlying any depositary receipts held by the offender,
for a period of not more than three years and a prohibition on the acquisition by the offender
89ASML ANNUAL REPORT 2003
Item 8
Financial
Information
Item 9
The Offer and
Listing
of our shares (or depositary receipts for shares) or the voting on our ordinary shares for a
period of not more than five years.
B. Related Party Transactions
There have been no material transactions during our most recent fiscal year, nor are there
presently any proposed material transactions to which ASML or any of its subsidiaries was
or is a party and in which any director or officer or any relative or spouse thereof had or will
have a direct or indirect material interest. During our most recent fiscal year, there has been no,
and at present there is no, outstanding indebtedness to ASML owed or owing by any director
or officer of ASML or any association thereof other than the virtual financing arrangement with
respect to share options described under Note 13 to our consolidated financial statements.
Our Chief Executive Officer, Mr. Dunn, is currently on the Supervisory Board of
STMicroelectronics N.V. (“STM”). We have entered into sales transactions, including system
shipments and service, with STM conducted at arms’ length. During the years 2003 and 2002,
ASML realized net sales on STM of less than 5 percent of our respective net sales.
C. Interests of Experts & Counsel
Not applicable
A. Consolidated Statements and Other Financial Information
Consolidated Statements
See Item 18 “Financial Statements”.
Legal Proceedings
See Item 4.B. “Business Overview” and Note 14 to our consolidated financial statements as
incorporated herein by reference.
Dividend Policy
ASML has no current intention to pay dividends on its ordinary shares. For more information
see Item 10.B. “Memorandum and Articles of Association” and Item 10.D. “Exchange Controls.”
B. Significant Changes
No significant changes have occurred since the date of our consolidated financial statements.
See “Item 5.D. “Trend Information.”
A. Listing Details
Our ordinary shares are listed for trading in the form of New York Shares on Nasdaq and
in the form of registered shares (“Amsterdam Shares”) on the Official Segment of the stock
market of Euronext Amsterdam. The principal trading market of our ordinary shares is
Euronext Amsterdam. For more information see Item 10.B “Memorandum and Articles of
Association.”
90ASML ANNUAL REPORT 2003
Historical information relating to the ordinary shares has been adjusted to give retroactive
effect to the three-for-one stock split in April 2000.
The following table contains high and low sales prices of the ordinary shares on Nasdaq,
as well as high and low prices of the ordinary shares on Euronext Amsterdam.
Annual High and Low Prices
of Shares on Nasdaq
and Euronext Amsterdam
Nasdaq Euronext Amsterdam
USD EUR
High Low High Low
1999 38.29 10.42 38.00 8.77
2000 50.25 17.63 52.00 22.20
2001 30.62 9.51 32.32 9.70
2002 25.80 4.95 29.79 5.13
2003 20.39 6.11 17.04 5.39
2004 22.67 19.09 17.92 15.50
(through January 29)
(Source: Bloomberg)
Quarterly High and
Low Prices of Shares
on Nasdaq and
Euronext Amsterdam
Nasdaq Euronext Amsterdam
USD EUR
High Low High Low
1st quarter 2002 25.61 17.14 29.18 18.90
2nd quarter 2002 25.80 13.45 29.79 13.21
3rd quarter 2002 16.18 5.35 16.36 5.25
4th quarter 2002 12.15 4.95 12.37 5.13
1st quarter 2003 9.75 6.11 9.38 5.39
2nd quarter 2003 11.06 6.57 9.52 5.98
3rd quarter 2003 16.93 9.55 15.29 8.20
4th quarter 2003 20.39 13.18 17.04 11.09
1st quarter 2004 22.67 19.09 17.92 15.50
(through January 29)
(Source: Bloomberg)
91ASML ANNUAL REPORT 2003
Item 10
Additional
Information
Monthly High and
Low Prices of Shares
on Nasdaq and
Euronext Amsterdam
Nasdaq Euronext Amsterdam
USD EUR
High Low High Low
July 2003 13.31 9.55 11.67 8.20
August 2003 16.11 11.78 14.90 10.35
September 2003 16.93 12.99 15.29 11.18
October 2003 17.70 13.18 15.12 11.09
November 2003 19.19 17.09 16.69 14.27
December 2003 20.39 17.72 17.04 14.53
Through January 29, 2004 22.67 19.09 17.92 15.50
(Source: Bloomberg)
B. Plan of Distribution
Not applicable
C. Markets
See Item 9.A. “Listing Details.”
D. Selling Shareholder
Not applicable
E. Dilution
Not applicable
F. Expenses of the Issue
Not applicable
A. Share Capital
Not applicable
B. Memorandum and Articles of Association
The information required by Item 10.B. is incorporated by reference to ASML’s Current Report
on Form 6-K, filed with the Commission on March 14, 2003.
ASML is subject to the relevant provisions of Dutch law applicable to large corporations
(‘Structuurregime’). These provisions have the effect of concentrating control over certain
corporate decisions and transactions in the hands of the Supervisory Board. The Supervisory
Board is self-electing; however, the General Meeting of Shareholders and the Works Council
each have a right of recommendation and a right to object to a proposed appointment of a
new member of the Supervisory Board.
92ASML ANNUAL REPORT 2003
Members of the Board of Management are appointed by the Supervisory Board.
The Supervisory Board shall notify the General Meeting of Shareholders of intended
appointments to the Board of Management. General Meetings of Shareholders are held at
least once a year. ASML does not solicit from or nominate proxies for its shareholders.
However, shareholders and other persons entitled to attend General Meetings of Shareholders
may be represented by proxies with written authority.
Extraordinary General Meetings of Shareholders may be held as often as deemed necessary
by the Supervisory Board or Board of Management and must be held if the Meeting of Priority
Shareholders or one or more Ordinary or Cumulative Preference Shareholders jointly
representing at least 10 percent of the issued share capital make a written request to that
effect to the Supervisory Board and the Board of Management specifying in detail the
business to be dealt with.
Resolutions are adopted at General Meetings of Shareholders by an absolute majority of the
votes cast (except where a different proportion of votes are required by the Articles of
Association or Dutch law) and there are generally no quorum requirements applicable to such
meetings. Each Ordinary, Cumulative Preference and Priority Share confers the right to one vote.
Current Authorizations to Issue and Repurchase Ordinary Shares
Our Board of Management has the power to issue ordinary shares and Preference Shares
if and insofar as the Board of Management has been authorized to do so by the General
Meeting of Shareholders (whether by means of an authorizing resolution or by an amendment
to our Articles of Association). The Board of Management requires the approval, however,
of the Supervisory Board and the Meeting of Priority Shareholders for such an issue.
The Board of Management, subject to these approvals, is currently authorized to issue
ordinary shares and/or rights thereto through September 25, 2004, up to a maximum of
10 percent of our issued share capital as of March 25, 2003 plus an additional 10 percent of
our issued share capital as of March 25, 2003 in connection with or in the occasion of mergers
and acquisitions. At our annual General Meeting of Shareholders to be held on March 18,
2004, our shareholders will be asked to extend this authority through September 18, 2005.
Holders of our ordinary shares have a pro rata preemptive right of subscription to any
issuance of ordinary shares for cash, which right may be limited or eliminated. These
shareholders have no pro rata preemptive subscription right with respect to any ordinary
shares issued for consideration other than cash or in the case of ordinary shares issued to
employees. If authorized for this purpose by the General Meeting of Shareholders (whether by
means of an authorizing resolution or by an amendment to our Articles of Association),
the Board of Management has the power, on approval by the Supervisory Board and the
Meeting of Priority Shareholders, to limit or eliminate the preemptive rights of holders of
ordinary shares. The Board of Management is currently authorized, subject to these approvals,
to limit or eliminate preemptive rights of holders of ordinary shares through September 25,
2004. A further designation may be effective for up to five years and may be renewed. At our
annual General Meeting of Shareholders to be held on March 18, 2004, our shareholders will
be asked to extend this authority through September 18, 2005.
93ASML ANNUAL REPORT 2003
We may repurchase ordinary shares at any time, subject to compliance with the requirements
of Netherlands law (and provided the aggregate nominal value of the ordinary shares held by
ASML or a subsidiary at any one time amounts to no more than one-tenth of our issued
share capital). Any such purchases are subject to the approval of the Supervisory Board and
the authorization (whether by means of an authorizing resolution or by an amendment to
our Articles of Association) of shareholders at our General Meeting of Shareholders, which
authorization may not be for more than 18 months. The Board of Management is currently
authorized, subject to Supervisory Board approval, to repurchase up to 10 percent of our
issued share capital through September 25, 2004 at a price between the nominal value of the
ordinary shares purchased and 110 percent of the market price of these securities on
Euronext Amsterdam or Nasdaq. At our annual General Meeting of Shareholders to be held
on March 18, 2004, our shareholders will be asked to extend this authority through
September 18, 2005.
Shareholder Approval for Share and Share Option Arrangements
for Board of Management
As of January 2004, ASML shall submit to the shareholders meeting for approval a proposal
regarding the arrangements in the form of shares or rights to acquire shares available to the
Board of Management, in accordance with the Dutch Corporate Governance Code effective
as of January 2004. This proposal includes how many shares or rights to acquire shares may
be awarded to the Board of Management and which criteria apply to an award or a modification.
We have not in the past and do not intend to establish stock option or purchase plans or other
equity compensation arrangements for members of our Supervisory Board.
Nasdaq rules require shareholder approval of stock option plans available to employees,
in general. However, Nasdaq has granted ASML an exemption from this requirement.
C. Material Contracts
Paying Agent, Conversion Agent and Registrar Agreement
between ASML Holding N.V. and The Bank of New York relating
to EUR 380,000,000 5.50 percent Convertible Subordinated
Notes due 2010
In May 2003, we issued EUR 380,000,000 of 5.50 percent Convertible Subordinated Notes due
2010 in an offering that included an offering outside the United States pursuant to Regulation
S under the Securities Act of 1933 (the “Securities Act”). The Bank of New York is acting as
pricing agent for the 5.5 percent Notes. The notes pay interest at an annual rate of 5.5 percent
with interest payable annually on May 15 of each year, commencing on May 15, 2004, and are
convertible into an aggregate of 26,573,426 of our ordinary shares at a conversion price of
EUR 14.30 per share, subject to adjustment, at any time prior to maturity. At any time on or
after May 22, 2006 the 5.5 percent Notes are redeemable at our option, provided that the
closing price of our shares on Euronext Amsterdam is above 150 percent of the conversion
price for twenty trading days out of a thirty-trading day period.
Agreement between Zeiss and ASML Holding N.V.
On October 24, 2003, ASML Holding N.V. entered into an agreement with Carl Zeiss SMT AG.
The agreement builds upon the existing strategic alliance between the parties and modifies
94ASML ANNUAL REPORT 2003
the pricing and margin determinations detailed in their 1997 agreement. Furthermore,
the agreement alters the existing contractual framework between the parties by providing new
warranty terms, intellectual property rights, and exclusivity rights to current optical system
products. The agreement also includes pricing terms for future optical systems.
D. Exchange Controls
There are currently no limitations, either under the laws of the Netherlands or in the Articles
of Association of ASML, to the rights of non-residents to hold or vote ordinary shares.
Cash distributions, if any, payable in euro on Veldhoven registered shares and on ASML’s
registered shares listed on Euronext Amsterdam may be officially transferred from the
Netherlands and converted into any other currency without being subject to any Netherlands
legal restrictions. However, for statistical purposes, such payments and transactions must
be reported by ASML to the Netherlands Central Bank. Furthermore, no payments, including
dividend payments, may be made to jurisdictions subject to certain sanctions, adopted by the
government of the Netherlands, implementing resolutions of the Security Council of the
United Nations. Cash distributions, if any, on New York Shares shall be paid in U.S. dollars,
converted at the rate of exchange on Euronext Amsterdam at the close of business on the
date fixed for that purpose by the Board of Management in accordance with the Articles of
Association. ASML has no current intention to pay dividends on its ordinary shares. For more
information see Item 10.B. “Memorandum and Articles of Association.”
E. Taxation
Netherlands Taxation
The statements below represent a summary of current Netherlands tax laws. The description
is limited to the material tax implications for a holder of ordinary shares who is not, or is not
deemed to be, a resident of the Netherlands for Netherlands tax purposes (a “Non-resident
Holder”). This description does not address special rules that may apply to special classes of
holders of ordinary shares and should not be read as extending by implication to matters not
specifically referred to herein. As to individual tax consequences, each investor in ordinary
shares should consult his or her tax counsel.
General
The acquisition of ordinary shares by a non-resident of the Netherlands should not be treated
as a taxable event for Netherlands tax purposes. The income consequences in connection
with owning and disposing of our ordinary shares are discussed below.
Substantial Interest
A person that, directly or indirectly, owns 5% or more of our share capital, or holds options
to purchase 5% or more of our share capital, is considered to have a substantial interest in
our shares or our options, as applicable. A deemed substantial interest is present if (part of)
a substantial interest has been disposed of, or is deemed to be disposed of, in a transaction
where no tax is recognized. Special attribution rules exist in determining the presence of
a substantial interest.
95ASML ANNUAL REPORT 2003
Income Tax Consequences for Non-Resident Holders on Owning and Disposing of
the Ordinary Shares
An individual who is a Non-resident Holder will not be subject to Netherlands income tax on
received income in respect of our ordinary shares or capital gains derived from the sale,
exchange or other disposition of our ordinary shares, provided that such holder:
• does not carry on and has not carried on a business in the Netherlands through a permanent
establishment or a permanent representative to which the ordinary shares are attributable;
• does not hold and has not held a substantial interest in our share capital or, in the event the
Non-resident Holder holds or has held a substantial interest in our share capital, such
interest is or was a business asset in the hands of the holder;
• does not share and has not shared directly (not through the beneficial ownership of ordinary
shares or similar securities) in the profits of an enterprise managed and controlled in the
Netherlands which owned or was deemed to have owned ASML’s ordinary shares;
• does not carry out and has not carried out any activities which generate taxable profit or
taxable wages to which the holding of ASML’s ordinary shares was connected;
• does not carry out and has not carried out employment activities in the Netherlands, does
not serve and has not served as a director or board member of any entity resident in the
Netherlands, and does not serve and has not served as a civil servant of a Netherlands
public entity with which the holding of ASML’s ordinary shares is or was connected; and
• is not an individual that has opted to be taxed as a resident of the Netherlands.
Corporate income tax for corporate Non-resident Holders
Income derived from ordinary shares or capital gains derived from the sale, exchange or
disposition of ordinary shares by a corporate Non-resident Holder is taxable if:
• the holder carries on a business in the Netherlands through a permanent establishment or
a permanent agent in the Netherlands (Netherlands enterprise) and the ordinary shares are
attributable to this permanent establishment or permanent agent, unless the participation
exemption (discussed below) applies; or
• the holder has a substantial interest in ASML, which is not allocable to his enterprise; or
• certain assets of the holder are deemed to be treated as a Netherlands enterprise under
Netherlands tax law and the ordinary shares are attributable to this Netherlands enterprise.
To qualify for the Netherlands participation exemption, the Holder must generally hold at least
5% of the nominal paid-in capital of ASML and meet other requirements.
Under most Netherlands tax treaties the right to tax capital gains realized by a Non-resident
Holder from the sale, exchange or other disposition of ordinary shares is allocated to the
holder’s country of residence and not the Netherlands.
96ASML ANNUAL REPORT 2003
Dividend Withholding Tax
In general, a dividend distributed by us in respect of our ordinary shares will be subject
to a withholding tax imposed by the Netherlands at a statutory rate of 25%.
Dividends include:
• dividends in cash or in kind;
• deemed and constructive dividends;
• consideration for the repurchase of ordinary shares (including a repurchase by a direct or
indirect subsidiary) in excess of the recognized average paid-in capital unless such
repurchase is for temporary investment or exempt;
• proceeds from the redemption of ordinary shares in excess of recognized paid-in capital;
• stock dividends equal to their nominal value (unless distributed out of recognized paid-in
share premium);
• repayment of paid-in capital not recognized as capital for Netherlands dividend withholding
tax purposes; and
• liquidation proceeds in excess of average paid-in capital recognized as capital for
Netherlands dividend withholding tax purposes.
A reduction of Netherlands dividend withholding tax can be obtained if:
• the participation exemption applies and the ordinary shares are attributable to a business
carried out in the Netherlands;
• the dividends are distributed to a qualifying EU corporate holder satisfying the conditions of
the EU Parent-Subsidiary Directive; or
• the rate is reduced by treaty; or
• surtax was due on the dividend distribution and the recipient is a resident of the Netherlands
Antilles or Aruba, a Member State of the EU or a country with which the Netherlands has
concluded a treaty for the avoidance of double taxation.
A Non-resident Holder of ordinary shares can be eligible for a partial or complete exemption
or refund of all or a portion of the above withholding tax under a tax treaty that is in effect
between the Netherlands and the Non-resident Holder’s country of residence. The Netherlands
has concluded such treaties with the United States, Canada, Switzerland, Japan, all European
Union member states, and other countries.
Under the Treaty between the United States of America and the Kingdom of the Netherlands
for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income (the “Tax Treaty”), dividends paid by us to a Non-resident Holder that is a
resident of the United States as defined in the Tax Treaty (other than an exempt organization
or exempt pension trust, as discussed below) are generally eligible for a reduction of the 25%
Netherlands withholding tax to 15% or, in the case of certain U.S. corporate shareholders
owning at least 10% of our voting power, to 5%, provided that the shareholder does not have
an enterprise or an interest in an enterprise that is, in whole or in part, carried on through a
permanent establishment or permanent representative in the Netherlands to which the
dividends are attributable. The Tax Treaty provides for a complete exemption from tax on
dividends received by exempt pensions trusts and exempt organizations, as defined therein.
Except in the case of exempt organizations, the reduced dividend withholding rate
(or exemption from withholding) can be applied at the source upon payment of the dividends,
provided that the proper forms have been filed in advance of the payment.
97ASML ANNUAL REPORT 2003
Exempt organizations remain subject to the statutory withholding rate of 25% and are required
to file for a refund of such withholding.
A Non-resident Holder may not claim the benefits of the Tax Treaty unless (I) it is a resident of
the United States as defined therein and (II) its entitlement to those benefits is not limited by
the provisions of article 26 (limitation on benefits) of the Tax Treaty.
Dividend Stripping Rules
Under Netherlands tax legislation regarding anti-dividend stripping, no exemption from,
or refund of, Netherlands dividend withholding tax is granted if the recipient of dividends paid
by ASML is not considered the beneficial owner of such dividends.
Surtax
As a result of Netherlands tax reform effective from January 1, 2001, ASML will be subject
to a 20% corporate income tax, or Surtax, on ‘excessive’ (evaluated based on certain criteria,
including previous dividend distributions) dividends ASML distributes during the period from
January 1, 2001 to, and including, December 31, 2005.
Gift or Inheritance Taxes
Netherlands gift or inheritance taxes will not be levied on the transfer of ordinary shares by
way of gift, or upon the death of a Non-resident Holder, unless:
(1) the transfer is construed as an inheritance or as a gift made by or on behalf of a person
who, at the time of the gift or death, is deemed to be, resident of the Netherlands; or
(2) the ordinary shares are attributable to an enterprise or part thereof that is carried on
through a permanent establishment or a permanent representative in the Netherlands.
For purposes of Netherlands gift and inheritance tax, an individual of Netherlands nationality
is deemed to be a resident of the Netherlands if he has been a resident thereof at any time
during the ten years preceding the time of the gift or death. For purposes of Netherlands gift
tax, a person not possessing Netherlands nationality is deemed to be a resident of the
Netherlands if he has resided therein at any time in the twelve months preceding the time of
the gift.
Value Added Tax
No Netherlands value added tax is imposed on dividends in respect of ASML’s shares or on
the transfer of ASML’s ordinary shares.
Residence
A Non-resident Holder will not become resident, or be deemed to be resident, in the
Netherlands solely as a result of holding ASML’s ordinary shares or of the execution,
performance, delivery and/or enforcement of rights in respect of ASML’s ordinary shares.
United States Taxation
The following is a discussion of the material U.S. federal income tax consequences relating to
the acquisition, ownership and disposition of ordinary shares by a U.S. Holder (as defined
below). This discussion deals only with ordinary shares held as capital assets and does not
98ASML ANNUAL REPORT 2003
deal with the tax consequences applicable to all categories of investors, some of which (such
as tax-exempt entities, passive foreign investment companies, banks, broker-dealers,
investors owning directly, indirectly or constructively 10% or more of our outstanding voting
shares, investors who hold ordinary shares as part of hedging or conversion transactions and
investors whose functional currency is not the U.S. dollar) may be subject to special rules. In
addition, the discussion does not address any alternative minimum tax or any state, local or
non-United States tax consequences. The following discussion is based on U.S. tax laws, and
judicial and administrative interpretations thereof as in effect on the date hereof, all of which
are subject to change, potentially retroactively.
This discussion is based on the Internal Revenue Code of 1986, as amended to the date
hereof, final, temporary and proposed Treasury Department regulations promulgated
thereunder, and administrative and judicial interpretations thereof, changes to any of which
subsequent to the date hereof, possibly with retroactive effect may affect the tax
consequences described herein. In addition, there can be no assurance that the Internal
Revenue Service will not challenge one or more of the tax consequences described herein,
and we have not obtained, nor do we intend to obtain, a ruling from the Internal Revenue
Service or an opinion of counsel with respect to the U.S. federal income tax consequences of
acquiring or holding shares. Prospective purchasers of ordinary shares are advised to consult
their tax advisers with respect to their particular circumstances and with respect to the effects
of U.S. federal, state, local or non-U.S. tax laws to which they may be subject.
As used herein, the term “U.S. Holder” means a beneficial owner of ordinary shares that
for U.S. federal income tax purposes is:
(1) an individual citizen or resident of the United States,
(2) a corporation or other entity treated as a corporation for U.S. federal income tax purposes
created or organized in or under the laws of the United States or of any political
subdivision thereof,
(3) an estate of which the income is subject to U.S. federal income taxation regardless of its
source,
(4) a trust whose administration is subject to the primary supervision of a court within the
United States and which has one or more U.S. persons who have the authority to control
all of its substantial decisions.
If an entity treated as a partnership for U.S. federal income tax purposes owns ordinary
shares, the U.S. federal income tax treatment of a partner in such partnership will generally
depend upon the status of the partner and the activities of the partnership. A partnership that
owns ordinary shares and the partners in such partnership should consult their tax advisors
about the U.S. federal income tax consequences of holding and disposing of the ordinary
shares.
Taxation of Dividends
U.S. Holders will include in gross income as foreign-source dividend income the gross amount
of any distribution (before reduction for Netherlands withholding taxes) ASML makes out of its
current or accumulated earnings and profits (as determined for United States federal income
tax purposes) when the distribution is actually or constructively received by the U.S. Holder.
Distributions will not be eligible for the dividends-received deduction generally allowed to
99ASML ANNUAL REPORT 2003
United States corporations in respect of dividends received from other United States
corporations. The amount of the dividend distribution includible in income of a U.S. Holder
should be the U.S. dollar value of the foreign currency (e.g. euro) paid, determined by the spot
rate of exchange on the date of the distribution, regardless of whether the payment is in fact
converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange
fluctuations during the period from the date the dividend payment is includible in income
to the date such payment is converted into U.S. dollars will be treated as ordinary income or
loss. Such gain or loss will generally be income from sources within the United States for U.S.
foreign tax credit purposes. Distributions in excess of current and accumulated earnings and
profits, as determined for United States federal income tax purposes, will be treated as a
non-taxable return of capital to the extent of the U.S. Holder’s basis in the ordinary shares and
thereafter as taxable capital gain. ASML does not maintain calculations of its earnings and
profits under United States federal income tax principles.
Subject to limitations provided in the U.S. Internal Revenue Code, a U.S. Holder may generally
deduct from its United States federal taxable income, or credit against its United States
federal income tax liability, the amount of any Netherlands withholding taxes. However,
Netherlands withholding tax may be deducted only if the U.S. Holder does not claim a credit
for any Netherlands or other non-U.S. taxes paid or accrued in that year. In addition,
Netherlands dividend withholding taxes will likely not be creditable against the U.S. Holder’s
United States tax liability to the extent ASML is not required to pay over the amount withheld
to the Netherlands Tax Administration. Currently, a Netherlands corporation that receives
dividends from qualifying non-Netherlands subsidiaries may credit source country tax withheld
from those dividends against Netherlands withholding tax imposed on a dividend paid by
a Netherlands corporation, up to a maximum of 3% of the dividend paid by the Netherlands
corporation. The credit reduces the amount of dividend withholding that ASML is required
to pay to the Netherlands Tax Administration but does not reduce the amount of tax ASML
is required to withhold from dividends.
Recently enacted U.S. tax legislation (the “2003 Tax Act”) reduces to 15% the maximum tax
rate for certain dividends received by individuals through taxable years beginning on or before
December 31, 2008, so long as certain holding period requirements are met. Dividends
received from “qualified foreign corporations” generally qualify for the reduced rate. A non-
U.S. corporation (other than a foreign personal holding company, foreign investment company,
or passive foreign investment company) generally will be considered to be a qualified foreign
corporation if (I) the shares of the non-U.S. corporation are readily tradable on an established
securities market in the United States or (II) the non-U.S. corporation is eligible with respect to
substantially all of its income for the benefits of a comprehensive income tax treaty with the
United States which contains an exchange of information program. The Tax Treaty has been
identified as a qualifying treaty. Individual U.S. Holders should consult their tax advisors
regarding the impact of the provisions of the 2003 Tax Act on their particular situations.
Taxation on Sale or Other Disposition of Ordinary Shares
Upon a sale or other disposition of ordinary shares, a U.S. Holder will generally recognize
capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference
between the amount realized, if paid in U.S. dollars, or the U.S. dollar value of the amount
realized (determined at the spot rate on the settlement date of the sale) if proceeds are paid
100ASML ANNUAL REPORT 2003
in currency other than the U.S. dollar, as the case may be, and the U.S. Holder’s tax basis
(determined in U.S. dollars) in such ordinary shares. Generally, the capital gain or loss will be
long-term capital gain or loss if the holding period of the U.S. Holder in the ordinary shares
exceeds one year at the time of the sale or other disposition. The deductibility of capital
losses is subject to limitations for U.S. federal income tax purposes. Gain or loss from the sale
or other disposition of ordinary shares generally will be treated as U.S. source income or loss
for U.S. foreign tax credit purposes. Generally, any gain or loss resulting from currency
fluctuations during the period between the date of the sale of the ordinary shares and the date
the sale proceeds are converted into U.S. dollars will be treated as ordinary income or loss
from sources within the United States. Each U.S. Holder should consult its tax advisor with
regard to the translation rules of its adjusted basis and the amount realized upon a sale or
other disposition of its ordinary shares if purchased in, or sold or disposed of for, a currency
other than U.S. dollar.
Information Reporting and Backup Withholding
Information returns may be filed with the Internal Revenue Service ("IRS") in connection with
payments on the ordinary shares or proceeds from a sale, redemption or other disposition of
the ordinary shares. A “backup withholding” tax may apply to these payments if the beneficial
owner fails to provide a correct taxpayer identification number to the paying agent and to
comply with certain certification procedures or otherwise establish an exemption from backup
withholding. Any amounts withheld under the backup withholding rules will be refunded
(or credited against the beneficial owner’s U.S. federal income tax liability, if any) provided
that the required information is furnished to the IRS.
The discussion set forth above is included for general information only and may not be
applicable depending upon a holder’s particular situation. Holders should consult their tax
advisors with respect to the tax consequences to them of the purchase, ownership and
disposition of shares including the tax consequences under state, local and other tax laws
and the possible effects of changes in U.S. federal and other tax laws.
F. Dividends and Paying Agents
Not applicable
G. Statement by Experts
Not applicable
H. Documents on Display
We are subject to certain of the reporting requirements of the Exchange Act. As a “foreign
private issuer”, we are exempt from the rules under the Exchange Act prescribing certain
disclosure and procedural requirements for proxy solicitations, and our officers, directors
and principal shareholders are exempt from the reporting and “short-swing” profit recovery
provisions contained in Section 16 of the Exchange Act, with respect to their purchases and
sales of shares. In addition, we are not required to file reports and financial statements with
the Commission as frequently or as promptly as U.S. companies whose securities are
registered under the Exchange Act. However, we will file with the Commission, within six
months after the end of each fiscal year, an annual report on Form 20-F containing financial
101ASML ANNUAL REPORT 2003
Item 11
Quantitative and
Qualitative
Disclosures
About Market
Risk
statements audited by an independent accounting firm. We publish unaudited interim financial
information after the end of each quarter. We furnish this quarterly financial information to the
Commission under cover of a Form 6-K.
You may read and copy any document we file with the Commission at its public reference
facilities at 450 Fifth Street, N.W., Washington, DC 20549, Woolworth Building, 233 Broadway,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. You may also obtain copies of the documents at prescribed
rates by writing to the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington DC 20549. The Commission also maintains a website that contains reports and
other information regarding registrants that are required to file electronically with the
Commission. The address of this website is http://www.sec.gov. Please call the Commission
at 1-800-SEC-0330 for further information on the operation of the public reference facilities.
I. Subsidiary Information
See Item 4.C. Organizational Structure”.
Market risk represents the risk of a change in the value of a financial instrument,
derivative or non derivative, caused by fluctuations in currency exchange rates and interest
rates. Our treasury department addresses market risk in accordance with established policies
and thereby enters into various derivative transactions. No such transactions are entered into
for trading purposes.
Our primary market risk exposures are related to currency exchange rates and interest rate
fluctuations. We actively review and monitor our exposure and risks related to changes in
exchange rates and interest rates, and we utilize derivative financial instruments to manage
these exposures. These instruments are not considered specialized or high risk and are
generally available from numerous sources. We do not enter into contracts or utilize
derivatives for speculative purposes. The terms of the financial instruments utilized are
consistent with the related underlying hedged exposure. Established controls are in place
covering all financial instruments, including policies, guidelines and a system of authorization
and reporting. All contracts have been entered into with major creditworthy financial
institutions, and the risk associated with these transactions is the cost of replacing these
agreements at the current market rates in the event of default by the counterparts. We do not
have significant concentration of risk with any single party in any of our financial instruments.
We regularly evaluate our use of financial instruments, including swaps, options and forward
contracts, and believe that the risk of incurring losses as a result of default is remote.
Foreign exchange risk
We operate globally and are thus exposed to foreign exchange risk arising from volatility in
various currency combinations. Foreign currency-denominated assets and liabilities, together
with expected cash flows from highly probable purchases and sales, give rise to this foreign
exchange risk exposure.
We price most of our product sales in euro, however we anticipate that a portion of our
revenues from net sales, cost of sales and expenses will remain denominated in U.S. dollars
102ASML ANNUAL REPORT 2003
for the foreseeable future. According to our foreign exchange policy guidelines, we hedge
material foreign exchange transaction risk exposure, such as sales transactions, forecasted
purchase cash flows and accounts receivable and payable. This exposure is mainly hedged
with derivative financial instruments such as foreign exchange forward contracts and foreign
exchange options. The effectiveness of all outstanding hedge contracts is closely monitored
throughout the life of the hedges. The majority of financial instruments that we use to hedge
foreign exchange risk have duration of less than a year. As of December 31, 2003,
we anticipate EUR 0.7 million of other comprehensive income to represent the total
anticipated loss to be charged to cost of sales and EUR 3 million to represent the total
anticipated gain to be released to cost of sales over the next 12 months as the forecasted sale
and purchase transactions occur.
Since we have subsidiaries outside the Eurozone, the euro–denominated value of our
shareholder’s equity is also exposed to fluctuations in exchange rates. Equity changes
caused by movements in foreign exchange rates are shown as a translation difference in
our consolidated financial statements included in Item 18. We use, from time to time,
foreign currency-denominated loans to hedge material translation exposure arising from
foreign net investments.
Interest rate risk
Our exposure to the market risk of changes in interest rates relates primarily to our debt
obligations. Interest rate swaps that are being used to hedge the fair value of fixed loan
coupons payable are designated as fair value hedges, with changes in fair value recorded
under interest income and expense in our statement of operations. The change in fair value is
intended to offset the change in the fair value of the underlying fixed loan coupons, which is
recorded accordingly. Interest rate swaps that are being used to hedge changes in the
variability of future interest receipts are designated as cash flow hedges. The critical terms of
the hedging instruments are the same as those for the underlying assets. Accordingly, all
changes in fair value of these derivative instruments are recorded as other comprehensive
income. The accumulated changes in fair value of the derivatives are intended to offset
changes in future interest cash flows on the assets. The hedging relationship between interest
rate swaps and hedged debt obligations is highly effective. See Item 5.A. “Operating Results,
Foreign Exchange Management” and Notes 1, 4 and 11 to our consolidated financial
statements, which are incorporated herein by reference.
Credit risk
Financial instruments contain an element of risk of the counterparties being unable to meet
their obligations. This financial credit risk is monitored and minimized per type of financial
instrument by limiting our counterparties to a sufficient number of major financial institutions.
We do not expect the counterparties to default given their high credit quality.
Furthermore, we are exposed to credit risk on our customers. We monitor our customer base
and use protective measures, such as letters of credit. Where deemed necessary, we establish
provisions for potential losses.
103ASML ANNUAL REPORT 2003
Item 12
Description of
Securities Other
Than Equity
Securities
Sensitivity analysis derivative financial instruments
The following table summarizes the Company’s derivative financial instruments, their market
values and their sensitivity to changes in foreign exchange rate or interest rates as of
December 31, 2002 and 2003:
Fair value Fair value change
change resulting resulting from a
from a 1% non- 10% weakening of
favorable increase EUR against other
Derivative Notional Amount Fair Value in interest rate currency
December 31 2002 2003 2002 2003 2002 2003 2002 2003
Forward contracts1 223,000 (54,173)2 845 444 N/A N/A 5,246 (4,398)
Currency options 41,000 8,314 782 (217) N/A N/A (12) (173)
Interest rate swaps 982,000 981,285 5,684 6,102 (18,659) 21,801 N/A N/A
(Source: Bloomberg)
1 Includes forward contracts on U.S. Dollars, Swedish Krona, British Pounds, Israeli Shekel, Japanese Yen andSingapore dollars.
2 Net amount of forward contracts assigned as a hedge to sales and purchase transactions, and to monetaryassets and liabilities.
The fair value of forward contracts (used for hedging purposes) is the estimated amount that a
bank would receive or pay to terminate the forward contracts at the reporting date, taking into
account current interest rates, current exchange rates and the current creditworthiness of the
counterparties.
The fair value of currency options (used for hedging purposes) is the estimated amount that a
bank would receive or pay to terminate the option agreements at the reporting date, taking
into account current interest rates, current exchange rates, volatility and the current
creditworthiness of the counterparties.
The fair value of interest rate swaps (used for hedging purposes) is the estimated amount that
a bank would receive or pay to terminate the swap agreements at the reporting date, taking
into account current interest rates and the current creditworthiness of the counterparties.
Not applicable
104ASML ANNUAL REPORT 2003
Item 13
Defaults,
Dividend
Arrearages and
Delinquencies
Item 14
Material
Modifications to
the Rights of
Security Holders
and Use of
Proceeds
Item 15
Controls and
Procedures
Item 16
Part II
None
None
Evaluation of Disclosure controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of December 31, 2003 (the “Evaluation Date”). Based on such
evaluation, those officers have concluded that, as of the Evaluation Date, our disclosure
controls and procedures are effective in alerting them on a timely basis to material information
relating to ASML (including its consolidated subsidiaries) required to be included in our
periodic filings under the Exchange Act.
Changes in Internal Controls over Financial Reporting
During the year ended December 31, 2003 there have not been any significant changes in our
internal controls over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting.
A. Audit Committee Financial Expert
The members of the Audit Committee are all independent, non-executive members of the
Supervisory Board. The Supervisory Board has determined that Mr. Syb Bergsma qualifies as
the Audit Committee Financial Expert.
B. Code of Ethics
ASML’s Code on Ethical Business Conduct
In 2001, ASML adopted its Principles of Ethical Business Conduct, which contain ASML’s
ethical principles in relation to various subjects. These Principles have been worked out into
day-to-day guidelines (called “Internal Guidelines on Ethical Business Conduct”) and were
introduced in March 2003. The Internal Guidelines apply to ASML employees worldwide,
including ASML’s Chief Executive Officer and Chief Financial Officer. In 2003, no amendments
have been made to, and no waivers were granted in respect of, ASML’s Principles of Ethical
Business Conduct, nor to ASML’s Internal Guidelines on Ethical Business Conduct. Our
Principles on Ethical Business Conduct are posted on our website.
105ASML ANNUAL REPORT 2003
The Internal Guidelines on Ethical Business Conduct contain, among others, written standards
that are reasonably designed to deter wrongdoing and to promote:
• honest and ethical conduct, including the ethical handling of actual or apparent conflicts of
interest between personal and professional relationships;
• full, fair, accurate, timely, and understandable disclosure in reports and documents that
ASML files with, or submits to, the SEC and in other public communications made by ASML;
• compliance with applicable governmental laws, rules and regulations;
• prompt internal reporting of violations on the Internal Guidelines on Ethical Business
Conduct to an appropriate person or persons identified in these guidelines; and
• accountability for adherence to the guidelines.
C. Principal Accountant Fees and Services
Deloitte & Touche has served as our independent public accountants for each of the years
ended in the three-year period ended December 31, 2003. The following table presents the
aggregate fees for professional audit services and other services rendered by Deloitte &
Touche in 2003 and 2002.
Year ended December 31 20021 20031
(Amounts in thousands)
Audit Fees 1,134 1,041
Audit-related Fees 24 104
Tax Fees 2,443 1,472
All Other Fees 0 89
Total 3,601 2,706
1 All fee amounts are excluding VAT.
Audit fees
Audit fees primarily relate to the audit of the ASML’s annual financial statements set forth in
our Annual Report on Form 20-F, agreed upon procedures work on our quarterly financial
results, services related to statutory and regulatory filings of our subsidiaries, services in
connection with accounting consultations and the offering of our EUR 380 million 5.50 percent
Convertible Subordinated Notes due 2010.
Audit-related fees
Audit related fees mainly comprise services in connection with consultations on implementing
the requirements under Sarbanes-Oxley Section 404.
106ASML ANNUAL REPORT 2003
Tax fees
Tax Fees can be detailed as follows:
Year ended December 31 20021 20031
Corporate Income Tax compliance services 919 576
Tax assistance for expatriate employees 476 476
Other tax advisory and compliance 1,048 420
Total2 2,443 1,472
1 All fee amounts are excluding VAT.2 As from January 1, 2004 onwards, Deloitte & Touche will reduce its services in providing tax assistance for
expatriate employees. Accordingly, we expect to incur lower fees from Deloitte & Touche relating to theseservices in 2004 and beyond.
Other fees
Other fees reflect expenditures for training and local compliance services (non-tax-related).
The Audit Committee has approved the external audit plan and related audit fees for the year
2003. The Audit Committee has adopted a policy regarding audit and non-audit services,
provided by Deloitte & Touche. This policy ensures the independence of our auditors by
expressly setting forth all services that the auditors may not perform and reinforcing the
principle of independence regardless of the type of work performed. Certain non-audit
services such as tax-related services and acquisition advisory are permitted. ASML has
chosen to use alternative suppliers for tax services that would ultimately involve the audit firm
in rendering an audit opinion on tax services performed by the same firm or services that are
of strategic nature. The Audit Committee pre-approves non-audit services not specifically
permitted under this policy and reviews the annual external audit plan and any subsequent
engagements.
107ASML ANNUAL REPORT 2003
Item 17.
Financial
Statements
Item 18.
Financial
Statements
Item 19.
Exhibits
Part III
Not applicable
In response to this item, the Company incorporates herein by reference the consolidated
financial statements of the Company set forth on pages F-2 through F-44 hereto.
Exhibit No. Description
1 Articles of Association of ASML Holding N.V. (English translation)
(Incorporated by reference to Amendment No. 6 to the Registrant’s
Registration Statement on Form 8-A/A, filed with the Commission on June 18,
2002 (File No. 0-25566))
2.1 Paying Agent, Conversion Agent and Registrar Agreement between ASML
Holding N.V. and the Bank of New York relating to the Registrant’s 5.75%
Convertible Subordinated Notes due 2006 (Incorporated by reference to
Exhibit 2.3. of the Registrant’s Annual Report on Form 20-F for the year ended
December 31, 2001
2.2 Paying Agent, Conversion Agent and Registrar Agreement between ASML
Holding NV and the Bank of New York relating to the Registrant’s 5.50 percent
Convertible Subordinated Notes due 2010*
4.1 Agreement between ASML Lithography B.V. and Carl Zeiss, dated March 17,
2000 (Incorporated by reference to the Registrant’s Annual Report on Form
20-F for the fiscal year ended December 31, 2000)
4.2 Agreement between ASML Holding N.V. and Carl Zeiss, dated October 24, 2003*
4.3 Form of Indemnity Agreement between ASML Holding N.V. and members of its
Board of Management*
4.4 Form of Indemnity Agreement between ASML Holding N.V. and members of its
Supervisory Board*
4.5 Employee Agreement between ASML Holding N.V. and Doug J. Dunn*
4.6 Employee Agreement between ASML Holding N.V. and Stuart K. McIntosh*
4.7 Employee Agreement between ASML Holding N.V. and David P. Chavoustie*
4.8 Form of Employee Agreement for members of the Board of Management.*
4.9 ASML New Hires and Incentive Stock Option Plan For Management (Version
2003) (Incorporated by reference to exhibit 4.4 to the Registrant’s Statement
on Form S-8, filed with the Commission on September 2, 2003
(File No. 333-109154)
8.1 List of Subsidiaries*
12.1 Certification of CEO and CFO Pursuant to Rule 13(a)-14(a) of the Securities
Exchange Act of 1934*
13.1 Certification of CEO and CFO Pursuant to Rule 13a-14(b) of the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*
14.1 Consent of Deloitte & Touche*
* Filed at the Commission herewith
108ASML ANNUAL REPORT 2003
Signatures
ASML Holding N.V. (or the registrant) hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this
annual report on its behalf.
ASML Holding N.V.
(Registrant)
/s/ Peter T.F.M. Wennink
By:
Peter T.F.M. Wennink
Principal Accounting and
Chief Financial Officer
Dated: January 30, 2004
109ASML ANNUAL REPORT 2003
ASML ANNUAL REPORT 2003
Index to Financial Statements
Financial Statements
F-2 Consolidated statements of operations for the years ended December 31,
2001, 2002 and 2003
F-3 Consolidated statements of comprehensive income (loss) for the years ended
December 31, 2001, 2002 and 2003
F-3 Consolidated balance sheets as of December 31, 2002 and 2003
F-4 Consolidated Statements of shareholders’ equity for the years ended
December 31, 2001, 2002 and 2003
F-5 Consolidated statements of cash flows for the years ended
December 31, 2001, 2002 and 2003
F-6 Notes to the consolidated financial statements
F-44 Independent Auditors’ Report
F1ASML ANNUAL REPORT 2003
F-2ASML ANNUAL REPORT 2003
Consolidated Statements of Operations1
For the years ended December 31 2001 2002 2003 20032
(Amounts in thousands, except per share data) EUR EUR EUR USD
Net product sales 1,335,608 1,740,633 1,356,905 1,713,697Net service sales 253,639 218,039 185,832 234,695
Total net sales 1,589,247 1,958,672 1,542,737 1,948,392
Cost of product sales 1,348,837 1,289,030 1,028,362 1,298,765Cost of service sales 209,397 202,038 145,593 183,876
3 Total cost of sales 1,558,234 1,491,068 1,173,955 1,482,641
Gross profit on sales 31,013 467,604 368,782 465,751
Research and development costs 347,333 324,419 305,839 386,25815 Research and development credits (16,223) (26,015) (19,119) (24,146)
Selling, general and administrative costs 245,962 263,243 212,609 268,513Merger and acquisition costs 41,477 0 0 0
3 Restructuring charges 3,082 0 24,485 30,923Operating loss (590,618) (94,043) (155,032) (195,797)
Interest income 41,786 31,177 40,481 51,126Interest expense (48,993) (67,958) (69,630) (87,939)
Minority interest in net results from subsidiaries 3,606 0 0 0Loss from continuing operations before income taxes (594,219) (130,824) (184,181) (232,610)
16 Benefits from income taxes 179,017 42,779 59,675 75,366Net loss from continuing operations (415,202) (88,045) (124,506) (157,244)
2 Loss from discontinued operations before income taxes (103,001) (183,624) (59,026) (74,547)16 Benefits from income taxes 39,211 63,846 23,316 29,447
Net loss from discontinued operations (63,790) (119,778) (35,710) (45,100)
Net loss (478,992) (207,823) (160,216) (202,344)
Basic net loss from continuing operations per ordinary share (0.89) (0.18) (0.26) (0.33)Basic net loss from discontinued operations per ordinary share (0.14) (0.26) (0.07) (0.09)
Basic net loss per ordinary share (1.03) (0.44) (0.33) (0.42)Diluted net loss from continuing operations per ordinary share (0.89) (0.18) (0.26) (0.33)
Diluted net loss from discontinued operations per ordinary share (0.14) (0.26) (0.07) (0.09)Diluted net loss per ordinary share (1.03) (0.44) (0.33) (0.42)
Number of ordinary shares used in computing per share amounts (in thousands)
Basic3 465,866 476,866 482,240 482,240Diluted3 465,866 476,866 482,240 482,240
1 See Note 2 “Discontinued operations” and Note 3 “Restructuring” to the consolidated financial statements.2 Solely for the convenience of the reader, certain euro amounts presented as of and for the year ended December 31, 2003, have been translated
into U.S. dollars using the exchange rate on December 31, 2003, of USD 1.00 = EUR 0.7918.3 All net income per ordinary share amounts have been retroactively adjusted to reflect the issuance of shares in connection with ASML’s merger
with SVG in May 2001.
F-3ASML ANNUAL REPORT 2003
Consolidated Statements of Comprehensive Income
For the years ended December 31 2001 2002 2003 2003(Amounts in thousands) EUR EUR EUR USD
Net loss (478,992) (207,823) (160,216) (202,344)Foreign currency translation 26,855 (9,269) (12,318) (15,557)
Gain (loss) on derivative instruments (111) 15,128 (7,158) (9,040)Comprehensive income (loss) (452,248) (201,964) (179,692) (226,941)
Consolidated Balance Sheets
As of December 31 2002 2003 2003(Amounts in thousands, except share and per share data) EUR EUR USD
AssetsCash and cash equivalents 668,760 1,027,806 1,298,063
5 Accounts receivable, net 556,664 314,495 397,1906 Inventories, net 730,025 595,017 751,47416 Current tax assets 178,706 0 016 Deferred tax assets short term 0 49,590 62,6297 Other current assets 175,095 157,912 199,4342 Assets from discontinued operations 106,094 5,007 6,324
Total current assets 2,415,344 2,149,827 2,715,114
16 Deferred tax assets 314,795 325,271 410,7997 Other assets 61,757 30,711 38,7868 Intangible assets, net 14,069 14,590 18,4269 Property, plant and equipment, net 495,723 347,883 439,357
Total assets 3,301,688 2,868,282 3,622,482
Liabilities and Shareholders’ Equity Accounts payable 213,423 220,153 278,041
3,10 Accrued liabilities and other 448,848 442,383 558,70516 Deferred tax liabilities short term 4,465 2,285 2,88616 Current tax liabilities 19,947 8,247 10,4162 Liabilities from discontinued operations 66,091 13,451 16,988
Total current liabilities 752,774 686,519 867,036
16 Deferred tax liabilities 133,516 169,641 214,24713 Other deferred liabilities 15,391 10,850 13,70311 Convertible subordinated debt 1,064,040 842,543 1,064,08611 Other long term debt 20,451 17,522 22,129
Total liabilities 1,986,172 1,727,075 2,181,201
12,14 Commitments and contingencies
Cumulative Preference Shares, EUR 0.02 nominal value; 900,000,000 shares authorized;
none outstanding as of December 31, 2002 and 2003 0 0 0
Priority Shares, EUR 0.02 nominal value; 23,100 shares authorized,
issued and outstanding as of December 31, 2002 and 2003 1 1 1
Ordinary Shares, EUR 0.02 nominal value; 900,000,000 sharesauthorized 482,182,485 shares issued and outstanding as
of December 31, 2002 and 482,513,502 as of December 31, 2003 9,643 9,650 12,187Share premium 870,453 875,829 1,106,124
Retained earnings 276,326 116,110 146,641Accumulated other comprehensive income 159,093 139,617 176,328
21 Total shareholders’ equity 1,315,516 1,141,207 1,441,281Total liabilities and shareholders’ equity 3,301,688 2,868,282 3,622,482
F-4ASML ANNUAL REPORT 2003
Consolidated Statements of Shareholders’ Equity
Shares Shares Share Retained Accumulated Total
Number Amount Premium Earnings Other
Comprehensive
Income
(Amounts in thousands) EUR EUR EUR EUR EUR
Balance at December 31, 2000 463,395 9,269 551,343 944,609 160,991 1,666,212
Components of comprehensive income:Net loss (478,992) (478,992)
Foreign Currency Translation 26,855 26,855Gain (loss) on derivative instruments (111) (111)
Issuance of ordinary shares 3,218 64 21,585 21,649Adjustment for pooling of interests
fourth quarter 2000 SVG 365 7 6,636 18,532 (34,501) (9,326)Balance at December 31, 2001 466,978 9,340 579,564 484,149 153,234 1,226,287
Components of comprehensive income:Net loss (207,823) (207,823)
Foreign Currency Translation (9,269) (9,269)Gain (loss) on derivative instruments 15,128 15,128
Issuance of Ordinary Shares 15,204 304 290,889 291,193Balance at December 31, 2002 482,182 9,644 870,453 276,326 159,093 1,315,516
Components of comprehensive income:Net loss (160,216) (160,216)
Foreign Currency Translation (12,318) (12,318)Gain (loss) on derivative instruments (7,158) (7,158)
Issuance of Ordinary Shares 332 7 5,376 5,383
Balance at December 31, 2003 482,514 9,651 875,829 116,110 139,617 1,141,207
F-5ASML ANNUAL REPORT 2003
Consolidated Statements of Cash Flows
Year ended December 31 2001 2002 2003 2003(Amounts in thousands) EUR EUR EUR USD
Cash Flows from Operating ActivitiesNet income (loss) from continued operations (415,202) (88,045) (124,506) (157,244)
Adjustments to reconcile net income to net cash flowsfrom operating activities:
Depreciation and amortization 126,759 166,035 144,800 182,874Impairment charges 12,200 20,651 12,100 15,282
Allowance for doubtful debts 3,310 0 9,113 11,509Allowance for obsolete inventory 367,140 112,164 32,431 40,959
Changes in assets and liabilities that provided (used) cash:Accounts receivable 308,978 (57,183) 211,627 267,273
Deferred income taxes (156,676) (22,361) (79,577) (100,501)Inventories (380,006) (77,408) 95,291 120,347
Other assets (111,673) 31,365 44,945 56,763Accrued liabilities 89,494 (41,683) (8,948) (11,301)Accounts payable 48,301 (71,927) 7,231 9,132
Income taxes payable (92,240) (25,759) 164,826 208,166Net cash provided by (used in) operating activities
from continuing operations (199,615) (54,151) 509,333 643,259
Cash Flows from Investing ActivitiesPurchases of property, plant and equipment (312,857) (138,587) (71,440) (90,225)
Proceeds from sale of property, plant and equipment 21,672 58,735 48,837 61,678Investments in financial fixed assets (34,404) 0 0 0
Purchase of intangible assets (506) 0 (3,099) (3,914)Net cash used in investing activities
from continuing operations (326,095) (79,852) (25,702) (32,461)
Cash Flows from Financing ActivitiesProceeds from issuance of convertible subordinated notes 652,176 0 380,000 479,919
Payment of underwriting commission (14,237) 0 (8,550) (10,798)Net proceeds from issuance of shares and stock options 26,351 26,630 6,360 8,032
Redemption and/or repayment of debt 0 (5,203) (445,966) 563,230Net cash provided by financing activities
from continuing operations 664,290 21,427 (68,156) (86,077)Net cash flows 138,580 (112,576) 415,475 524,721
Minority interest (121,119) 0 0 0Effect of changes in exchange rates on cash 17,604 (1,869) (69,165) (87,351)
Net cash used by SVG for the quarterended December 31, 2000 1 (38,772) 0 0 0
Net cash flow (used) provided by discontinued operations (69,815) (127,473) 12,736 16,086
Net increase (decrease) in cash and cash equivalents (73,522) (241,918) 359,046 453,456Cash and cash equivalents at beginning of the year 984,200 910,678 668,760 844,607
Cash and cash equivalents at end of the year 910,678 668,760 1,027,806 1,298,063
Supplemental Disclosures of Cash Flow Information:Cash paid for:
Interest 33,444 66,614 48,980 61,859Taxes 73,922 3,642 11,974 15,123
Supplemental non-cash investing and financing activities:Conversion of Bonds into 13,634,782 and 536 ordinary shares
respectively in 2002 and 2003 0 265,411 16 20
1 The decrease in net cash used by SVG for the quarter ended December 31, 2000 consists of EUR 31,659 provided by operating activities, EUR (16,336) used for investing activities, EUR (58,430) used for discontinued activities and EUR 4,335 provided by financing activities.
Principles of
consolidation
Use of estimates
Foreign currency
translation
Notes to the Consolidated Financial Statements
1. Summary of significant accounting policies
The accompanying consolidated financial statements include the Financial Statements of
ASML Holding N.V. Veldhoven, the Netherlands, and its consolidated subsidiaries (together
referred to as “ASML” or the “Company”). ASML is a worldwide business engaged in the
development, production, marketing, sale and servicing of advanced semiconductor
equipment systems, mainly consisting of lithography systems. ASML’s principal operations
are in the Netherlands, the United States and Asia.
ASML follows accounting principles generally accepted in the United States of America
(“U.S. GAAP”). ASML’s reporting currency is the euro. The accompanying consolidated
financial statements are stated in thousands of euro (“EUR”) unless indicated otherwise except
that, solely for the convenience of the reader, certain euro amounts presented as of and for
the year ended December 31, 2003 have been translated into United States dollars (“USD”)
using the exchange rate in effect on December 31, 2003 of USD 1.00 = EUR 0.7918.
These translations should not be construed as representations that the euro amounts could
be converted into U.S. dollars at that rate.
On May 21, 2001, ASML merged with SVG, a company active in the Lithography, Track and
Thermal business. The merger with SVG is accounted for under the “pooling of interests”
method. For accounting and financial reporting purposes, the companies are presented as if
they were merged for all periods presented.
On December 18, 2002 ASML announced the proposed divestiture of its Thermal business,
including related customer support activities, and the termination of its activities in the Track
business. As a result of this decision, the presentation of the Company’s financial statements
and the notes thereto have been retroactively adjusted to reflect the effects of the decision to
discontinue these operations. In October 2003, ASML substantially completed the divestiture
of its Thermal business. See Note 2.
The consolidated financial statements include the accounts of ASML Holding N.V. and all of its
majority-owned subsidiaries. All inter-company profits, transactions and balances have been
eliminated in the consolidation.
The preparation of ASML’s consolidated financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities on the balance sheet
dates and the reported amounts of revenue and expense during the reported periods.
Actual results could differ from those estimates.
The financial information for subsidiaries outside the euro-zone is generally measured
using local currencies as the functional currency. The financial statements of those foreign
subsidiaries are translated into euro in the preparation of ASML’s consolidated financial
F-6ASML ANNUAL REPORT 2003
Derivative
financial
instruments
statements. Assets and liabilities are translated into euro at the exchange rate in effect on the
respective balance sheet dates. Income and expenses are translated into euro based on the
average rate of exchange for the corresponding period. The resulting translation adjustments
are recorded directly in shareholders’ equity. Currency differences on inter-company loans
that have the nature of a long-term investment are also accounted for directly in shareholders’
equity.
The Company principally uses derivative foreign currency hedging instruments for the
management of foreign currency risks. Applying Statement of Financial Accounting Standards
(“SFAS”) No. 133 “Accounting for Derivative Instruments and Hedging Activities” and SFAS
No. 138 “Accounting for Certain Derivative Instruments and Certain Hedging Activities an
amendment of SFAS No. 133” the Company measures all derivative foreign currency hedging
instruments based on fair values derived from market prices of the instruments. The Company
adopts hedge accounting for all hedges that are highly effective in offsetting the identified
hedged risks as required by the SFAS No. 133 effectiveness criteria.
Cash Flow Hedges
Forwards and options used to hedge the impact of the fluctuations in exchange rates on cash
flows from purchase activities and sales transactions in non-functional currencies are treated
as cash flow hedges. The critical terms of the hedging instruments are the same as those for
the underlying transactions, and thus these hedging relationships are perfectly effective.
The changes in fair value of the derivatives are intended to offset changes in the expected
cash flows from the underlying transactions. The change in the fair value of cash flow hedges
are deferred in other comprehensive income until the underlying exposure is recognized in the
statement of operations.
When the underlying hedged transaction is recognized, the related gain or loss on the cash
flow hedge accumulated in other comprehensive income is released to the statement of
operations. Gains and losses on hedges on sales transactions are recognized in revenue,
while gains and losses on hedges on forecasted purchase transactions are recognized in cost
of sales. In the event that the underlying hedged transaction does not occur, or it becomes
probable that it will not occur, the gain or loss on the related cash flow hedge is immediately
released from accumulated other comprehensive income and included in the statement of
operations.
Interest rate swaps that are being used to hedge changes in the variability of future interest
receipts are designated as cash flow hedges. The critical terms of the hedging instruments are
the same as those for the underlying assets. Accordingly, all changes in fair value of these
derivative instruments are recorded as other comprehensive income. The accumulated
changes in fair value of the derivatives are intended to offset changes in future interest cash
flows on the assets.
Fair Value Hedges
Forwards used to hedge accounts receivable, accounts payable and other monetary assets
and liabilities denominated in non-functional currencies are designated as fair value hedges.
Both the changes in the fair value of these hedges and their underlying exposure are
recognized in the statement of operations.
F-7ASML ANNUAL REPORT 2003
Cash and cash
equivalents
Inventories
Intangible assets
Property, plant
and equipment
Interest rate swaps that are being used to hedge the fair value of fixed loan coupons payable
are designated as fair value hedges, with changes in fair value recorded under interest income
and expense in the statement of operations. The change in fair value is intended to offset the
change in the fair value of the underlying fixed loan coupons, which is recorded accordingly.
The Company records any ineffective portion of foreign currency hedging instruments in cost
of sales in the statement of operations. Ineffectiveness of hedging instruments had a positive
impact of EUR 0 million, EUR 0.8 million and EUR 3 million on cost of sales in 2003, 2002 and
2001, respectively. The ineffective portion of interest rate swaps is recorded in interest income
(expense). The Company did not have benefits or costs due to ineffectiveness of interest rate
swaps in 2003 and 2002.
Cash and cash equivalents consist primarily of highly liquid investments, such as bank
deposits and commercial paper, with insignificant interest rate risk and remaining maturities
of three months or less at the date of acquisition.
Inventories are stated at the lower of cost (first-in, first-out method) or market value.
Cost includes net prices paid for materials purchased, charges for freight and customs duties,
production labor cost and factory overhead. Allowances are made for slow moving,
obsolete or unsaleable inventory.
Intangible assets include acquired intellectual property rights that are valued at cost and are
amortized on a straight-line basis over the term of the rights ranging from 3 to 10 years.
Property, plant and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method based on the estimated
useful lives of the related assets. In the case of leasehold improvements, the estimated useful
lives of the related assets do not exceed the remaining term of the corresponding lease.
The following table presents the assigned economic lives of ASML’s property, plant and
equipment:
Category Assigned economic life
Buildings and constructions 5 – 40 years
Machinery and equipment 2 – 5 years
Office furniture/fixtures 3 – 5 years
Leasehold improvements 5 – 10 years
Certain internal and external costs associated with the purchase and/or development of
internally used software are capitalized when both the preliminary project stage is completed
and management has authorized further funding for the project, which it has deemed probable
to be completed and to be usable for the intended function. These costs are amortized on
a straight-line basis over the period of related benefit, which ranges primarily from two to
five years.
F-8ASML ANNUAL REPORT 2003
Evaluation of
long-lived assets
for impairment
Recognition of
revenues, income
and expenses
Cost of sales
Restructuring
The Company evaluates its long-lived assets, which include property, plant and equipment
and intangible assets, for impairment whenever events or changes in circumstances indicate
that the carrying amount of those assets may not be recoverable. Recoverability of these
assets is measured by a comparison of the carrying amount of the asset to future
undiscounted net cash flows expected to be generated by the asset. If those assets are
considered to be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the asset. Assets held
for sale are reported at the lower of the carrying amount or fair value less the cost to sell.
ASML distinguishes between revenues from “new” and “proven” technology systems.
Revenue for “proven technology” systems is recognized upon shipment, since title passes
to the customer at that moment, and the customer has unconditionally accepted the system
during a factory test prior to shipment. Revenues on “new technology” systems are deferred
until installation and acceptance at the customer’s premises are completed. As soon as
a track record has been established regarding the successful and timely installation and
acceptance of equipment previously identified as “new technology,” ASML considers the
equipment to be “proven technology”. At that time, ASML changes the timing of revenue
recognition to the shipment date in accordance with its revenue policy for “proven technology”
and recognizes previously deferred revenue. In the second half of 2002, the TWINSCAN
technology, which was previously identified as “new technology”, has been marked “proven
technology.”
The fair value of installation services provided to the customers is initially deferred and is
recognized when the installation is completed. Sales from service contracts are recognized
when performed. Revenue from prepaid service contracts is recognized over the life of the
contract.
Costs of product sales comprise direct product costs such as materials, labor, cost of
warranty, depreciation, shipping and handling costs and related overhead costs. Repayments
of certain technical development credits, which are calculated as a percentage of sales, are
also charged to cost of product sales (see “Research and development costs and credits,”
below). ASML accrues for the estimated cost of the warranty on its systems, which includes
the cost of labor and parts necessary to repair systems during the warranty period. The
amounts recorded in the warranty accrual are estimated based on actual historical expenses
incurred and on estimated probable future expenses related to current sales. Actual warranty
costs are charged against the accrued warranty reserve. Costs of service sales comprise
direct service costs such as materials, labor, depreciation and overhead costs relating to
providing extended warranty and maintenance services.
ASML applies the criteria defined in SFAS No. 146, “Accounting for Costs Associated with
Exit or Disposal Activities” and SFAS No. 112, Employers’ Accounting for Postemployment
Benefits”, in order to determine when a liability for restructuring or exit costs should be
recognized. With respect to employee termination costs, the Company adopts SFAS No.146
(effective since January 1, 2003) in the case of benefit arrangements that, in substance,
do not constitute an ongoing benefit arrangement. SFAS No. 112 is adopted when termination
benefits are provided under an ongoing benefit arrangement. SFAS No. 146 establishes that
a liability for a cost associated with an exit or disposal activity shall be recognized and
F-9ASML ANNUAL REPORT 2003
Research and
development
costs and credits
Income taxes
Stock options
measured initially at its fair value in the period in which the liability is incurred; that is,
when a detail plan exists, has been committed to by management and has been communicated
to the employees. SFAS No. 112 establishes that a liability for termination benefits provided
under an ongoing benefit arrangement covered by SFAS No. 112 is recognized when the
likelihood of future settlement is probable and can be reasonably estimated.
Other exit costs include purchase and other commitments to be settled or fulfilled.
Related costs are estimated based on expected settlement fees and committed payments,
taking into account future potential benefits, if any, from those commitments.
Costs relating to research and development are charged to operating expense as incurred.
Funds received from third parties in research activities are required to advance the design
of "new technology" systems to the point that it meets specific functional and economic
requirements and is ready for manufacturing. These funds are recorded as research and
development credits in the period in which the related research and development costs are
incurred. Subsidies and other governmental credits for research and development costs
relating to approved projects are recorded as research and development credits in the period
when the research and development cost to which the subsidy or credit relates occurs.
Technical development credits (Technische Ontwikkelingskredieten or “TOKs”) received from
the Netherlands government to offset the cost of certain research and development projects
are contingently repayable, including accrued interest, as a percentage of the revenues from
future sales, if any, of equipment developed in such projects. These repayments are charged
to cost of sales at the time such sales are recorded (see Note 15). No repayments are required
if such sales do not occur.
The asset and liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are recognized for the tax effect of incurred net operating
losses and for tax consequences attributable to differences between the balance sheet
carrying amounts of existing assets and liabilities and their respective tax bases. If it is more
likely than not that the carrying amounts of deferred tax assets will not be realized,
a valuation allowance will be recorded to reduce the carrying amounts of those assets
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in the results of operations in the period that includes the enactment date.
ASML applies Accounting Principles Board Opinion (“APB”) 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option plans. SFAS No. 123,
“Accounting for Stock-Based Compensation,” amended by SFAS No. 148, “Accounting for
Stock-Based Compensation – Transition and Disclosure” allows companies to elect to
recognize the fair value of the stock options granted to employees as an expense, or to
account for stock option plans using the intrinsic value method under APB 25 and provide pro
forma disclosure of the impact of the fair value method on net income and earnings per share.
F-10ASML ANNUAL REPORT 2003
Under the provisions of APB 25, no significant compensation expense was recorded for
ASML’s stock-based compensation plans for the years ended December 31, 2003, 2002 and
2001. Had compensation cost been determined based upon the fair value at the grant date
for awards under the plan consistent with the methodology prescribed under SFAS No. 148,
ASML’s net income (loss) and calculation for net income (loss) per ordinary share would have
been as follows (net of related tax effects):
Year ended December 31 2001 2002 2003
(Amounts in thousands,
except per share data)
Net income (loss)
As reported (478,992) (207,823) (160,216)
Pro forma (550,028) (284,000)1 (177,912)
Basic net income (loss)
per ordinary share
As reported (1.03) (0.44) (0.33)
Pro forma (1.18) (0.60) (0.37)
Diluted net income (loss)
per ordinary share
As reported (1.03) (0.44) (0.33)
Pro forma (1.18) (0.60) (0.37)
1 Contains compensation for extension of stock option plans that consequently creates a new measurement date.
Certain ASML stock option plans, where employees can buy options, contain terms and
conditions that enable exercise within 6 weeks after the vesting period in case an employee
terminates his contract during the vesting period. These stock options are not cancelled in
case of termination because employees have bought these options. In prior years the related
compensation expense was recognized ratably over the vesting period as it is the Company’s
intent to provide stock options for future services. However, according to APB 25, SFAS No.
123 and related discussions, this compensation expense needs to be recognized at the date
of grant as the terms and conditions indicate that the options are granted for past services.
In 2003, the Company revised the pro forma net income and pro forma per share amounts for
2001 and 2002 to adjust the above-mentioned change in calculation of the pro forma
compensation expense.
The estimated weighted average fair value of options granted during 2001, 2002 and 2003
was EUR 20.68, EUR 11.55 and EUR 6.66 respectively, on the date of grant using the Black-
Scholes option-pricing model, with the following assumptions in 2001, 2002 and 2003
respectively: no dividend yield, volatility of 74.0, 87.4 percent and 85.2 percent, risk-free
interest rate of 4.95, 3.18 and 3.60 percent, no assumed forfeiture rate and an expected life
of two years after the vesting period.
F-11ASML ANNUAL REPORT 2003
Net income
(loss) per
ordinary share
Comprehensive
income
Segment
disclosure
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted
average ordinary shares outstanding for that period. Diluted net income (loss) per share
reflects the potential dilution that could occur if options issued under ASML’s stock
compensation plan were exercised, and if ASML’s convertible notes were converted, unless
the exercise of the stock options or conversion of the notes would have an anti-dilutive effect.
The dilutive effect is calculated using the treasury method. As a result of the losses incurred
by the Company, there is no difference between basic and diluted earnings in 2003, 2002 and
2001 because the assumed conversion of loans and exercise of stock options would have
been anti-dilutive.
A summary of the basic and diluted weighted average number of shares is as follows:
Year ended December 31 2001 2002 2003
(Amounts in thousands)
Basic weighted average shares outstanding 465,866 476,866 482,240
Diluted weighted average shares outstanding 465,866 476,866 482,240
Excluded from the diluted weighted average share outstanding calculation are cumulative
preference shares contingently issuable to the preference share foundation, since they
represent a different class of stock than the ordinary shares. See further discussion in
Note 21.
Comprehensive income consists of net income (loss) and other comprehensive income (loss).
Other comprehensive income (loss) refers to revenues, expenses, gains and losses that are
not included in net income, but recorded directly in shareholders’ equity. For the years ended
December 31, 2003, 2002 and 2001, comprehensive income consists of net income (loss),
unrealized gains and losses on derivative financial instruments and foreign currency translation
adjustments.
Prior to 2002, ASML reported in two business segments, Lithography and Track & Thermal.
As ASML decided in 2002 to terminate its Track business and to divest its Thermal business,
they are presented as discontinued operations and no longer disclosed as a separate
segment. ASML operates in three general geographic areas. See Note 17.
F-12ASML ANNUAL REPORT 2003
Newly adopted
accounting
pronouncements
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure”. SFAS No. 148 amends SFAS No. 123,
“Accounting for Stock-Based Compensation”, to provide alternative methods of transition
to the SFAS No. 123 fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 requires disclosures of the effects of an entity’s
accounting policy with respect to stock- based compensation on reported net income (loss)
and earnings per share in annual and interim financial statements in the summary of significant
accounting policies. As permitted under SFAS No. 148, the Company adopted the disclosure
only provisions of that accounting standard.
In April 2003 the FASB issued SFAS No. 149, “Amendment of SFAS No. 133 on Derivative
Instruments and Hedging Activities”. SFAS No. 149 amends and clarifies financial accounting
and reporting for derivative instruments by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, this statement clarifies the
circumstances under which a contract with an initial net investment meets the characteristics
of a derivative, clarifies when a derivative contains a financing component, amends the
definition of an underlying to conform it to the language used in FIN No. 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others” and amends certain other existing pronouncements. SFAS No. 149
is effective for contracts entered into or modified after June 30, 2003, except as stated below
and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149
did not have a material impact on the Company’s consolidated results of operations, financial
condition or liquidity.
In May 2003 the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity”. SFAS No. 150 modifies the accounting
for certain financial instruments that, under previous guidance, issuers could account for as
equity. SFAS No. 150 requires that those instruments be classified as liabilities in statements
of financial position. The adoption of SFAS No. 150 did not have a material impact on the
Company’s consolidated results of operations, financial condition or liquidity.
In November 2002, the FASB published FIN 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”.
FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. FIN 45 also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair value, or market
value, of the obligations it assumes under that guarantee and must disclose that information in
its interim and annual financial statements. The disclosure provisions of FIN 45 were effective
for financial statements of interim or annual periods that ended after December 15, 2002. The
provisions for initial recognition and measurement are effective on a prospective basis for
guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor’s
year-end. The adoption of FIN 45 did not have a material impact on the Company’s
consolidated results of operations, financial condition or liquidity.
In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), an interpretation of Accounting
F-13ASML ANNUAL REPORT 2003
Research Bulletin No. 51, “Consolidated Financial Statements,” which requires the
consolidation by a business enterprise of variable interest entities if the business enterprise
is the primary beneficiary. The FASB has amended FIN 46, now known as FIN 46 Revised
December 2003 ("FIN 46R"). The requirements of FIN 46 or FIN 46R are effective to those
entities that are considered to be special-purpose entities no later than as of the end of the
first reporting period that ends after December 15, 2003. The Company adopted FIN 46R
as it is party to a transaction involving a variable interest entity relating to the lessor of the
Veldhoven headquarters building that has been constructed in 2003. See Note 12.
2. Discontinued operations
On December 18, 2002 ASML announced the proposed sale of its Thermal business and
the termination of its activities in the Track business. Both discontinued businesses met
the criteria of SFAS No. 144 and have been classified accordingly.
In December 2002 the Company reviewed its long-lived assets used in the Thermal business
for potential impairment and recorded no impairment charges. During 2003, ASML’s
management again reviewed its long-lived assets for impairment as the Company entered
into negotiations with several potential buyers and accordingly recorded pre-tax impairment
charges of EUR 16.0 million. In October 2003, the Company completed the sale of its Thermal
business to a privately held company formed by VantagePoint Venture Partners. At the time
of the sale, no gain or loss was realized as the net assets were stated at the value equal to the
proceeds of the sale. The net loss of the Thermal business amounted to EUR 32.3 million in
2003 compared to EUR 61.2 million in 2002.
The termination of the Track business resulted in an exit plan that included workforce
reductions, fixed asset impairments and inventory write-offs due to discontinued product lines.
The exit plan included the disposal of remaining assets related to the Track business. In 2002,
ASML decided to continue to service its existing customers for whom ASML has warranty or
other service obligations. Consequently, customer support related to the Track business was
not included in discontinued operations for 2002. In June 2003, ASML sold certain of its fixed
assets and inventories related to its Track business to Rite Track. No gain or loss was realized
on the sale. The net loss of the Track business amounted to EUR 3.4 million in 2003 compared
to EUR 58.6 million for 2002. The net loss from operations for 2002 included total pre-tax
estimated exit costs of EUR 47.0 million. These exit costs included asset impairments,
inventory write downs, purchase and other commitment settlements and employee termination
costs. The net loss in 2003 relates mainly to impairment charges recorded on a building in the
United States, previously used by the Company’s Track business. This impairment was
determined on the difference between the building’s estimated fair value, as indicated by
an independent real estate appraiser and its carrying value.
The tax effects arising from, asset impairment costs, employee termination costs, inventory
write-off and losses from discontinued operations mostly reside and will remain with ASML
U.S. group companies. These losses can be offset against future profits from continuing
operations of these U.S. group companies.
F-14ASML ANNUAL REPORT 2003
Summarized results of operations for discontinued operations are as follows:
Year ended December 31 2001 2002 2003
Revenues
Track 51,472 7,236 2,514
Thermal 203,642 105,929 38,198
Total 255,114 113,165 40,712
Loss from discontinued operations,
net of taxes
Track loss from operations (20,946) (27,991) (1,456)
Track exit costs (net of taxes) 0 (30,626) (1,944)
Thermal loss from operations (42,844) (61,161) (21,906)
Thermal exit costs (net of taxes) 0 0 (10,404)
Total (63,790) (119,778) (35,710)
Summarized assets and assumed liabilities from discontinued operations are as follows:
As of December 31 2001 2002 2003
Assets
Intangible assets 2,101 4,410 0
Tangible fixed assets 48,675 32,994 3,167
Inventories 90,619 34,693 0
Receivables 59,552 33,064 1,840
Other 7,875 933 0
Total Assets 208,822 106,094 5,007
Liabilities
Accounts payable 14,801 10,463 0
Accrued liabilities 53,053 41,741 13,451
Installation and warranty 25,862 13,887 0
Total Liabilities 93,716 66,091 13,451
ASML organizes its financing activity at the corporate level and does not allocate funding toindividual net assets identified as assets from discontinued operations. The following tablerepresents cash flows directly attributable to ASML’s discontinued operations.
Year ended December 31 2001 2002 2003
Net cash provided by (used in)
operating activities of discontinued operations (35,937) (121,039) 12,736
Net cash used in investing activities of
discontinued operations (33,878) (6,434) 0
Net cash provided by (used in) discontinued
operations (69,815) (127,473) 12,736
F-15ASML ANNUAL REPORT 2003
F-16ASML ANNUAL REPORT 2003
3. Restructuring
As a result of the industry’s prolonged downturn, ASML announced on July 16, 2003
restructuring measures to further reduce costs company-wide by further reducing its
workforce with approximately 550 positions worldwide. The Company recorded a provision
of EUR 15 million of which EUR 3.7 million is included in cost of sales and EUR 11.3 million is
included in restructuring costs. The Board of Management and the Dutch Works Council are
nearing the completion of a joint study on implementing these workforce reductions in the
Netherlands. Consequently, the Dutch workforce reduction has been delayed.
During 2003, ASML recorded a charge of approximately EUR 7 million in restructuring costs
relating to the consolidation of its office and warehouse facilities at its headquarters in Veldhoven
as the Company ceased using certain of its facilities. The facility exit charges included:
• estimated future obligations for non-cancelable lease payments (net of estimated sublease
income of EUR 25 million). The Company’s management estimated the cost of exiting by
referring to the contractual terms of the lease agreements and by evaluating the sublease
agreements concluded for these facilities or, where applicable, by referring to amounts
being negotiated; and
• the impairment of property and equipment (primarily leasehold improvements) for which
there are insufficient cash flows to support the carrying cost. The property and equipment
impairment was determined based on the difference between the assets’ estimated fair
value and their carrying value.
On December 18, 2002 ASML announced measures to contain costs for its lithography
business, including customer support, to lower the breakeven point by adjusting labor
capacity and increasing operating flexibility. ASML recorded provisions of EUR 78.5 million
during 2002 for slow-moving and obsolete lithography inventory and impairments of tangible
fixed assets that were recorded as cost of sales. ASML further announced its intention to
reduce its lithography-related workforce by approximately 700 positions worldwide
(11.7 percent). The related lay-off costs were largely recorded in 2003 since the final details
on the plan had not been finally determined by December 31, 2002. With respect to this plan,
the Company recorded in 2003 restructuring charges for a total amount of EUR 6.7 million of
which EUR 4 million in cost of sales and EUR 2.7 million in restructuring costs. This restruc-
turing plan was completed in 2003.
On October 16, 2001, as a consequence of the downturn in the semiconductor industry,
ASML announced cost reductions and a restructuring plan which resulted in the consolidation
of manufacturing facilities and discontinuance of certain product lines related to SVG.
As a result of this restructuring plan, the Company recorded a restructuring provision in
2001 for an amount of EUR 402.7 million mainly relating to inventory write-offs, purchase
commitments, fixed asset write-offs and severance payments. This restructuring provision
was recorded in cost of sales for an amount of EUR 399.6 million and in restructuring costs for
an amount of EUR 3.1 million and was mainly used in 2001 and 2002.
Foreign currency
management
The following table summarizes the restructuring provision as of December 31, 2003, 2002
and 2001:
Purchase Building Severance Total
commitments closure costs payments
Balance as of December 31, 2000 0 0 0 0
Utilization of the year 0 (1,512) (5,955) (7,467)
Additions 51,761 3,565 15,125 70,451
Adjustments 0 0 0 0
Effect of foreign currency translation 0 5 11 16
Balance as of December 31, 2001 51,761 2,058 9,181 63,000
Utilization of the year (27,126) (2,044) (6,580) (35,750)
Adjustments (6,337) 2,116 (1,686) (5,907)
Effect of foreign currency translation (8,272) (330) (915) (9,517)
Balance as of December 31, 2002 10,026 1,800 0 11,826
Utilization of the year (4,711) (3,475) (6,906) (15,092)
Additions 0 6,833 22,182 29,015
Adjustments (3,326) 1,653 0 (1,673)
Effect of foreign currency translation (1,111) (395) (5) (1,511)
Balance as of December 31, 2003 878 6,416 15,271 22,565
Adjustments to the 2001 restructuring plan amounting to EUR 5,907 and EUR 1,673 have been
recognized in 2002 and 2003 respectively and are classified as cost of sales.
These adjustments relate mainly to more favorable settlement agreements with vendors
on purchase commitments than the Company had estimated.
4. Market risk and derivatives
Market risk represents the risk of a change in the value of a financial instrument, derivative
or non derivative, caused by fluctuations in currency exchange rates and interest rates.
The Company addresses market risk in accordance with established policies and thereby
enters into various derivative transactions. No such transactions are entered into for trading
purposes.
The Company uses the euro as its invoicing currency in order to limit the exposure to foreign
currency movements. Exceptions may occur on a customer by customer basis. To the extent
that invoicing is done in a currency other than the euro, the Company is exposed to foreign
currency risk.
It is the Company’s policy to hedge material transaction exposures, such as sales transactions
and forecasted cash flows from sales and accounts receivable/accounts payable. ASML
hedges these exposures through the use of foreign exchange options and forward contracts.
The use of a mix of foreign exchange options and forwards is aimed at reflecting the likelihood
of the transactions occurring. The effectiveness of all outstanding hedge contracts is
monitored closely throughout the life of the hedges.
F-17ASML ANNUAL REPORT 2003
Interest rate
management
Financial
instruments as
of December 31,
2003
During the twelve months ended December 31, 2003, no gains or losses were recognized in
cost of sales relating to hedges of forecasted transactions that did not occur. As of December 31,
2003, EUR 0.7 million of other comprehensive income represents the total anticipated loss to be
charged to cost of sales, and EUR 3 million is the total anticipated gain to be released to cost
of sales over the next twelve months as the forecasted revenue and purchase transactions occur.
It is the Company’s policy to hedge material re-measurement exposures. These net exposures
from certain monetary assets and liabilities in non-functional currencies are hedged with
forward contracts. Furthermore, the Company uses forward contracts to hedge its 320 million
Swedish Krona loan to Micronic.
It is the Company’s policy to manage material translation exposures resulting predominantly
from ASML’s U.S. dollar net investments. Up until December 5, 2003, a proportion of ASML’s
USD 520 million 4.25 percent Convertible Subordinated Notes due 2004 was assigned to
certain of the Company’s net U.S. dollar investments. For the period from December 5, 2003
through December 31, 2003 a proportion of ASML’s USD 575 million 5.75 percent Convertible
Subordinated Notes due 2006 was assigned to certain of the Company’s net U.S. dollar
investments as ASML’s USD 520 million 4.25 per cent Convertible Subordinated Notes due
2004 has been fully redeemed. As a result, fluctuations in the Company’s balance sheet ratio’s
resulting from changes in exchange rates are reduced.
The Company has both assets and liabilities that bear interest, which expose the Company
to fluctuations in the prevailing market rate of interest. The Company uses interest rate swaps
to align the interest typical terms of interest bearing assets with the interest typical terms of
interest bearing liabilities. The Company still retains residual financial statement exposure risk
to the extent that the asset and liability positions do not fully offset. It is the Company’s
policy to enter into interest rate swaps to hedge this residual exposure. For this purpose,
the Company uses interest rate swaps, both to hedge changes in market value of fixed loan
coupons payable due to changes in interest rates as well as to hedge the variability of future
interest receipts as a result of changes in market interest rates.
Primary financial instruments recorded on the balance sheet include cash and cash
equivalents, accounts receivable and accounts payable. The carrying amount of these financial
instruments approximates their fair value due to the short-term nature of these instruments.
The following table summarizes the estimated fair values of the Company’s financial
instruments:
As of December 31 2002 2003
Notional Notional
Financial Instruments Amount Fair Value Amount Fair Value
Forward contracts1 223,000 845 (54,173)2 444
Currency options 41,000 782 8,314 (217)
Interest rate swaps 982,000 5,684 981,285 6,102
(Source: Bloomberg)1 Includes forward contracts on U.S. Dollars, Swedish Krona, British Pounds, Israeli Shekel, Japanese Yen and
Singapore dollars.2 Net amount of forward contracts assigned as a hedge to sales and purchase transactions, and to monetary
assets and liabilities.
F-18ASML ANNUAL REPORT 2003
Credit risk
The fair value of forward contracts (used for hedging purposes) is the estimated amount that a
bank would receive or pay to terminate the forward contracts at the reporting date, taking into
account current interest rates, current exchange rates and the current creditworthiness of the
counterparties.
The fair value of currency options (used for hedging purposes) is the estimated amount that a
bank would receive or pay to terminate the option agreements at the reporting date, taking
into account current interest rates, current exchange rates, volatility and the current
creditworthiness of the counterparties.
The fair value of interest rate swaps (used for hedging purposes) is the estimated amount
that a bank would receive or pay to terminate the swap agreements at the reporting date,
taking into account current interest rates and the current creditworthiness of the
counterparties.
Financial instruments contain an element of risk of the counterparties being unable to meet
their obligations. This financial credit risk is monitored and minimized per type of financial
instrument by limiting ASML’s counterparties to a sufficient number of major financial
institutions. ASML does not expect the counterparties to default given their high credit quality.
Furthermore, the Company is exposed to credit risk on its customers. ASML monitors its
customer base and uses protective measures, such as letters of credit. Where deemed
necessary, provisions for potential losses are recorded.
5. Accounts receivable
Accounts receivable consist of the following:
As of December 31 2002 2003Gross accounts receivable 556,988 320,691
Allowance for doubtful debts (324) (6,196)Net accounts receivable 556,664 314,495
A summary of activity in the allowance for doubtful debt:
Year ended December 31 2001 2002 2003Balance at beginning of year (1,439) (2,754) (324)
Utilization of the provision 0 2,430 3,241Additional provision in the year (1,315) 0 (9,113)
Balance at end of year (2,754) (324) (6,196)
F-19ASML ANNUAL REPORT 2003
6. Inventories
Inventories consist of the following:
As of December 31 2002 2003
Raw materials 267,054 229,740
Work-in-process 366,440 319,209
Finished products 381,795 259,690
Total inventories, gross 1,015,289 808,639
Allowance for obsolescence and/or
lower market value (285,264) (213,622)
Total inventories, net 730,025 595,017
A summary of activity in the allowance for obsolescence is as follows:
Year ended December 31 2001 2002 2003
Balance at beginning of year (131,819) (500,491) (285,264)
Provision of the year1 (393,005)1 (112,164)1 (32,431)
Effect of exchange rates (4,013) 36,673 22,976
Utilization of the provision 28,346 290,718 81,097
Balance at end of year (500,491) (285,264) (213,622)
1 Refer to Note 3, “Restructuring”
7. Other assets
Other non-current assets consist of the following:
As of December 31 2002 2003
Loan to Micronic AB1 35,176 0
Compensation plan assets2 10,994 8,720
Prepaid expenses 14,915 16,130
Subordinated loan granted to lessor
in respect of Veldhoven headquarters3 0 5,445
Other 672 416
Total other long-term assets 61,757 30,711
1 The loan to Micronic has a notional amount of 320 million Swedish Krona and is non-interest bearing. The loan is repayable in 2004 or can be converted into 1 million shares of Micronic upon the first request of ASMLand has therefore been classified as other current assets.
2 For further details on compensation plan refer to Note 13.3 For further details on loan granted to lessor in respect of Veldhoven headquarters refer to Note 12.
F-20ASML ANNUAL REPORT 2003
Other current assets consist of the following:
As of December 31 2002 2003
Loans to Zeiss 76,443 71,268
VAT 34,654 16,528
Loan to Micronic AB1 0 35,242
Prepaid expenses 43,745 31,813
Other 20,253 3,061
Total other current assets 175,095 157,912
1 The loan to Micronic has a notional amount of 320 million Swedish Krona and is non-interest bearing. The loan is repayable in 2004 or can be converted into 1 million shares of Micronic upon the first request of ASML.
The non-interest bearing loans to Zeiss are repayable by future shipments of lenses or can
be redeemed in cash depending on the specific contractual terms of the individual loans.
8. Intangible assets
In 1999, ASML obtained, through its purchase of the business of MaskTools, the intellectual
property rights relating to Optical Proximity Correction technology. This technology enhances
leading edge lithography systems to accurately and reliably print line widths below 0.2 micron.
These rights have been valued at cost and are amortized on a straight-line basis over their
estimated useful life of 10 years.
In 2003, ASML acquired a patent portfolio, relating to dual stage technology. This patent portfolio
has been valued at cost and is amortized on a straight-line basis over its estimated life of 3 years.
As of December 31 2002 2003
Cost
Balance, January 1 20,475 20,475
Additions 0 3,099
Balance, December 31 20,475 23,574
Accumulated amortization
Balance, January 1 4,200 6,406
Amortization 2,206 2,578
Balance, December 31 6,406 8,984
Net book value December 31 14,069 14,590
Estimated amortization expenses relating to intangible assets for the next five years are as follows:
2004: 3,653
2005: 3,575
2006: 2,100
2007: 2,100
2008: 2,100
Thereafter: 1,062
F-21ASML ANNUAL REPORT 2003
9. Property, plant and equipment
Property, plant and equipment consist of the following:
Buildings Machinery Office
and and Leasehold furniture and
constructions equipment improvements fixtures Total
CostBalance, January 1 166,980 598,746 112,819 154,051 1,032,596
Additions1 524 48,208 6,209 16,499 71,440Disposals (2,041) (125,249) (21,860) (372) (149,522)
Reclassifications 0 (6,213) 2,845 3,368 0Effect of exchange rates (15,351) (37,778) (1,476) (4,959) (59,564)
Balance,December 31, 20031 150,112 477,714 98,537 168,587 894,950
Accumulated depreciationBalance, January 1 60,599 309,111 56,597 110,566 536,873
Depreciation 4,580 94,639 12,551 22,690 134,460Impairment 0 12,100 0 0 12,100
Disposals (394) (79,029) (21,119) (143) (100,685)Reclassifications 0 (2,612) 205 2,407 0
Effect of exchange rates (7,206) (23,008) (955) (4,512) (35,681)Balance,
December 31, 2003 57,579 311,201 47,279 131,008 547,067
Net Book ValueDecember 31, 2002 106,381 289,635 56,222 43,485 495,723December 31, 2003 92,533 166,513 51,258 37,579 347,883
1 Includes as of December 31, 2003 assets under construction for buildings and constructions of EUR 591,machinery & equipment of EUR 2,310, leasehold improvements of EUR 38 and office furniture and fixtures ofEUR 8,383.
During 2003, the Company recorded impairment charges of EUR 12.1 million in cost of sales
on machinery and equipment, for which there are insufficient cash flows to support the
carrying cost. The impairment charges were determined based on the difference between the
assets’ estimated fair value and their carrying value.
10. Accrued liabilities and other
Accrued liabilities and other consist of the following:
As of December 31 2002 2003Deferred revenue 35,274 44,542
Warranty and installation 69,684 33,331Materials and costs to be paid 73,620 65,554
Advances from customers 126,860 187,677Personnel related items 60,814 53,229
Investment credits payable 31,651 12,282Restructuring 11,826 22,565
Other 39,119 23,203Total accrued liabilities and other 448,848 442,383
F-22ASML ANNUAL REPORT 2003
Convertible debt
securities
11. Long-term debt and borrowing arrangements
The Company’s obligations to make principal repayments under long-term debt and borrowing
arrangements as of December 31, 2003, for the next five years and thereafter, assuming no
conversions occur and excluding the fair value of interest rate swaps used to hedge the fair
value, are as follows:
2004 0
2005 2,317
2006 466,522
2007 2,132
2008 526
Thereafter 381,310
Total 852,807
The following table summarizes the Company’s outstanding Convertible Subordinated Notes
as of December 31, 2003, including fair value of interest rate swaps used to hedge the fair
value of the underlying fixed loan coupon:
As of December 31 2002 2003
4.25 percent convertible
Notional amount 495,757 0
Fair value interest rate swaps 0 0
Total 495,757 0
5.75 percent convertible
Notional amount 548,298 455,285
Fair value interest rate swaps 19,985 8,411
Total 568,283 463,696
5.50 percent convertible
Notional amount 0 380,000
Fair value interest rate swaps 0 (1,153)
Total 0 378,847
Total convertible debt 1,064,040 842,543
In April 1998, ASML completed an offering of EUR 272 million principal amount of its
2.5 percent Convertible Subordinated Notes due 2005, with interest payable annually
commencing April 9, 1999. In April 2002, ASML exercised its option to redeem and did
thereby call for redemption on May 3, 2002, all of the Company’s remaining outstanding
bonds (EUR 268.5 million) at a redemption price of 100.00 percent of the principal amount of
the bonds plus accrued interest. Before May 3, 2002, bondholders converted bonds for a total
of EUR 265.4 million into 13,634,782 ordinary shares.
In November 1999, ASML completed an offering of USD 520 million principal amount of its
4.25 percent Convertible Subordinated Notes due November 30, 2004, with interest payable
semi-annually on November 30 and May 30 of each year, commencing on May 30, 2000.
In July and August 2003, ASML repurchased USD 139.6 million. In October 2003, ASML called
for redemption on December 5, 2003, all of the bonds that remained outstanding, at a
redemption price of 100.85 percent of their principal amount plus accrued interest.
F-23ASML ANNUAL REPORT 2003
Other long term
debt
Before December 5, 2003, bondholders converted bonds for a total of USD 120 thousand into
1,430 ordinary shares, of which USD 20 thousand were converted into 536 shares in 2003. On
December 5, 2003, the Company redeemed the remaining USD 380.3 million.
In October 2001, ASML completed an offering of USD 575 million principal amount of its
5.75 percent Convertible Subordinated Notes due October 15, 2006, with interest payable
semi-annually on April 15 and October 15 of each year, commencing on April 15, 2002.
The notes are convertible into 30,814,576 ordinary shares at USD 18.66 (EUR 14.77) per share
at any time prior to maturity. At any time on or after October 22, 2004, the notes are
redeemable at the option of ASML, in whole or in part, at 100 percent of its principal amount,
together with accrued interest, provided that the Company’s shares close above 130 percent
of the conversion price for twenty trading days out of a thirty-day period. During 2003 none
of the notes were converted into ordinary shares.
In May 2003, ASML completed an offering of EUR 380 million principal amount of its
5.50 percent Convertible Subordinated Notes due 2010, with interest payable annually on
May 15 of each year, commencing on May 15, 2004. The notes are convertible into an
aggregate of 26,573,426 ordinary shares at a conversion price of EUR 14.30 per share, subject
to adjustment, at any time prior to maturity. Unless previously converted, the notes are
redeemable at 100% of its principal amount on May 15, 2010. ASML may call the notes for
early redemption at any time after May 22, 2006, provided that ASML’s shares close above
150% of the conversion price for twenty trading days out of a thirty-day period.
Interest rate swaps are used to hedge the risk from interest rate fluctuations. As of December
31, 2003, deferred interest rate swap proceeds amounting to EUR 7.3 million have been
recorded in the balance sheet as an addition to the Company’s outstanding Convertible
Subordinated Notes.
The following table summarizes the estimated fair values of ASML’s Convertible Subordinated
Notes:
As of December 31 2002 2003
Notional Notional
Amount Fair Value Amount Fair Value
4.25 percent convertible 495,757 429,467 N/A N/A
5.75 percent convertible 548,298 467,443 455,285 596,992
5.50 percent convertible N/A N/A 380,000 541,975
(Source: Bloomberg)
The fair value of the Company’s long-term debt is estimated based on the quoted market
prices as of December 31, 2002 and December 31, 2003, respectively.
These loans do not contain any covenants.
In February 1997, the Company received a USD 6.5 million (EUR 5.1 million) loan from the
Connecticut Development Authority. The loan has a ten-year term, bears interest at 8.25
F-24ASML ANNUAL REPORT 2003
Lines of credit
Lease
Commitments and
Variable Interests
percent, and is secured by the Company’s Wilton, Connecticut, U.S. facility. At December 31,
2003, the Company’s outstanding debt with respect to this loan amounted to USD 2.7 million
(EUR 2.1 million).
In 1999, the Company assumed three yen-denominated loans in connection with its merger
with SVG. Approximately EUR 3.7 million (JPY 503 million) is outstanding at December 31,
2003, which is secured by land and buildings in Japan, is payable in monthly installments
through the year 2011, bearing interest at 2.5 percent. Approximately EUR 10 million (JPY
1,350 million) and EUR 1.5 million (JPY 200 million) are outstanding at December 31, 2003.
These loans are unsecured, repayable in 2006 and 2007, and bear interest at 3.1 percent and
2.2 percent, respectively, payable semi-annually.
These loans do not contain any covenants.
At December 31, 2003, the Company had credit available facilities for a total of EUR 288
million (2002, EUR 288 million), all of which expire in 2005. These credit lines bear interest at
the European Interbank Offered Rate (EURIBOR) plus a margin. No amounts were outstanding
under these credit facilities at the end of 2003 and 2002. The credit facilities contain certain
restrictive covenants, including a requirement that the Company maintains a minimum financial
condition ratio of 40%, calculated in accordance with a contractually agreed formula.
ASML was in compliance with these covenants at December 31, 2002 and 2003. ASML does
not currently anticipate any difficulty in continuing to meet these covenant requirements.
12. Commitments, contingencies and guarantees
The Company has various contractual obligations, some of which are required to be recorded
as liabilities in the Company’s consolidated financial statements, including long- and short-
term debt. Others, namely operating lease commitments and purchase obligations, are
generally not required to be recognized as liabilities on the Company’s balance sheet but are
required to be disclosed.
The Company leases equipment and buildings under various operating leases. Operating
leases are charged to expense on a straight-line basis. See Tabular Disclosure of Contractual
Obligations below.
The Company has concluded several operating leases for its buildings that contain
a purchase option. In December 2003, the FASB issued FIN 46R, “Consolidation of
Variable Interest Entities”. FIN 46R introduces a new concept of a variable interest entity.
An enterprise must consolidate a variable interest entity if that enterprise has a variable
interest (or combination of variable interests) that will absorb a majority of the entity’s
expected losses if they occur, receive a majority of the entity’s expected residual returns
if they occur, or both. For each of the individual leases for its buildings, the Company
concluded that it is not the primary beneficiary to the expected losses or to the expected
residual returns or to both.
The Company is party to a transaction involving a variable interest entity relating to the lessor
of the Veldhoven headquarters building that has been completed in 2003.
F-25ASML ANNUAL REPORT 2003
Purchase
Obligations
Other Off-Balance
Sheet
Arrangements
Tabular
Disclosure of
Contractual
Obligations
Total assets of the variable interest entity amount to approximately EUR 54 million and are
funded through:
• variable interest entity's equity of EUR 1.9 million;
• straight loans granted by the shareholders of the variable interest entity of EUR 12.3 million,
partly redeemable over 15 years and quarterly interest-bearing;
• a third party loan of EUR 34.9 million, partly redeemable over 15 years and quarterly
interest-bearing; and
• a subordinated loan provided by the Company of EUR 5.4 million.
The lease will expire in 2018. The Company has an option to purchase the property,
at a predetermined price scheme, throughout the term of the lease. The purchase option at
the end of the lease term amounts to EUR 24.5 million. In accordance with FIN 46R the
Company has concluded that it is not the primary beneficiary in the lessor entity to the
expected losses or to the expected residual returns or to both. As a result the Company did
not consolidate the specific assets and liabilities of this variable interest entity
in its financial statements.
The Company enters into purchase commitments with vendors in the ordinary course of
business to ensure a smooth and continuous supply chain for key components. Purchase
obligations include medium to long-term purchase agreements. These contracts differ and
may include certain restrictive clauses. Any identified losses that would result from purchase
commitments that are expected to be forfeited are provided for in the Company’s financial
statements. As of December 31, 2003, the Company had purchase commitments for a total
amount of approximately EUR 335 million, which are not recorded on the Company’s balance
sheet. In its negotiations with suppliers the Company continuously seeks to align its purchase
commitments with its business objectives.
See Tabular Disclosure of Contractual Obligations below.
The Company has certain additional commitments and contingencies that are not recorded
on its balance sheet but may result in future cash requirements. In addition to the operating
lease commitments and the purchase obligations, these off-balance sheet arrangements
consist of product warranties, a call option granted to a third party to acquire our optics
business at fair value and guarantees of subsidiary’s debt to a third party.
The Company provides guarantees to third parties in connection with transactions entered
into by its subsidiaries in the ordinary course of business: These include bank loans reflected
in Note 11.
The Company’s off-balance sheet arrangements with respect to operating lease obligations
and purchase obligations as of December 31, 2003 can be summarized as follows:
F-26ASML ANNUAL REPORT 2003
Pension plans
Total Less than 1-3 3-5 After 5
1 year years Years years
Operating Lease Obligations 386,112 47,005 72,448 67,699 198,960
Purchase Obligations 335,115 300,170 34,945 0 0
Total Contractual Obligations 721,227 347,175 107,393 67,699 198,960
Operating lease obligations include leases of equipment and facilities. Rental expense was
EUR 61 million, EUR 56 million and EUR 53 million for the years ended December 31, 2001,
2002 and 2003, respectively.
13. Employee benefits
In February 1997, SVG adopted a non-qualified deferred compensation plan that allowed
a select group of management and highly compensated employees and directors to defer
a portion of their salary, bonus and commissions. The plan allowed SVG to credit additional
amounts to participants’ account balances, depending on the amount of the employee’s
contribution, up to a maximum of 5 percent of an employee’s annual salary and bonus.
In addition, interest is credited to the participants’ account balances at 120 percent of the
average Moody’s corporate bond rate. For calendar years 2001, 2002 and 2003, participants’
accounts were credited at 9.54 percent, 8.89 percent and 8.50 percent, respectively.
SVG’s contributions and related interest became 100 percent vested in May 2001 with the
merger of SVG and ASML. During fiscal years 2001, 2002 and 2003, the expense incurred
under this plan was EUR 2 million, EUR 1 million and EUR 0.9 million, respectively.
As of December 31, 2002 and 2003, the Company’s liability under the deferred compensation
plan was EUR 14 million and EUR 9 million, respectively.
In July 2002, ASML adopted a non-qualified deferred compensation plan for its U.S.
employees that allows a select group of management or highly compensated employees
to defer a portion of their salary, bonus, and other benefits. The plan allows ASML to credit
additional amounts to the participants’ account balances. The participants invest their funds
between the investments available in the plan. Participants elect to receive their funds in
future periods after the earlier of their employment termination or their withdrawal election,
at least 3 years after deferral. There were minor plan expenses in 2003. On December 31,
2002 and 2003, the Company’s liability under the deferred compensation plan was EUR 1
million and EUR 2 million, respectively.
ASML and its consolidated subsidiaries maintain various retirement plans covering
substantially all of its employees. Employees in the Netherlands participate in a multi-employer
union plan determined in accordance with the respective collective bargaining agreements.
This plan is subject to a salary cap. Employees with a salary exceeding this cap also
participate in an ASML defined contribution pension plan.
For employees working outside the Netherlands, ASML maintains a defined contribution
pension plan, with employer contribution based on a percentage of salary. For employees
participating in the United States pension plan, the Company may make, at its sole discretion,
an additional contribution to the plan if the Company meets certain financial performance
criteria. No such additional contributions were made in 2001, 2002 or 2003.
F-27ASML ANNUAL REPORT 2003
Bonus plan
Profit-sharing
plan
Stock options
1998
1999
The Company’s pension costs for all employees were:
Year ended December 31 2001 2002 2003
Pension plan based on multi-employer
union plan 17,528 15,059 16,514
Pension plans based on defined contribution 6,609 7,265 6,636
Total 24,137 22,324 23,150
ASML has a performance-related bonus plan for senior management, who are not members
of the Board of Management. Under this plan, the ultimate bonus amount is dependant on
the actual performance on corporate, departmental and personal targets. The bonus for senior
management can range between 0 percent and 60 percent of their annual salary. For the years
2001 and 2002, no bonuses were granted. A bonus for senior management is accrued for in
the statement of operations for the year ended December 31, 2003 for an amount of EUR 6.5
million, expected to be paid in the first quarter of 2004.
ASML has a profit-sharing plan covering all employees. Under the plan, employees who are
eligible receive an annual profit-sharing bonus, based on a percentage of net income to sales
ranging from 0 to 20 percent of annual salary. The profit-sharing percentage for each of the
years 2001, 2002 and 2003 was 0 percent.
Each year, the Board of Management determines, by category of ASML personnel, the total
available number of options that can be granted in that year. The determination is subject
to the approval of the Supervisory Board and the holders of priority shares of the Company.
In 1998, the Company issued 3,348,576 options to purchase ordinary shares, consisting of
options to purchase 2,097,831 ordinary shares for eligible employees of ASML and options
to purchase 1,250,745 ordinary shares for key personnel and management. This issuing of
options included a feature whereby eligible employees were given the right to elect to receive
options to purchase ordinary shares in lieu of distribution under the profit-sharing plan.
The options have fixed exercise prices equal to the closing price of the Company’s ordinary
shares on Euronext Amsterdam on the applicable grant dates. Stock options granted to
eligible employees vested over a three-year period with any unexercised stock options
expiring six years after the grant date. Stock options granted to key personnel in 1998 vested
over a three and four-year period with any unexercised stock options expiring six years after
the grant date.
In 1999, stock options were authorized to purchase up to 3,000,000 ordinary shares,
including a feature whereby eligible employees were given the right to elect to receive options
to purchase ordinary shares in lieu of distribution under the profit sharing plan. The options
have fixed exercise prices equal to the closing price of the Company’s ordinary shares on
Euronext on the applicable grant dates. Granted stock options vested over a three-year
period with any unexercised stock options expiring six years after the grant date.
F-28ASML ANNUAL REPORT 2003
2000
2001
2002
2003
Stock Option
Extension Plans
Financing of
stock option
plans
In 2000, options were authorized to purchase up to 4,500,000 ordinary shares. Granted stock
options vest over a three-year period with any unexercised stock options expiring six years
after the grant date.
In 2001, options were authorized to purchase up to 6,000,000 ordinary shares, including
a feature whereby eligible employees were given the right to elect to receive options to
purchase ordinary shares in lieu of distribution under the profit sharing plan. Options granted
under these plans have fixed exercise prices that are equal either to the closing price of the
Company’s ordinary shares on Euronext on the applicable grant date, or 135 percent of the
closing price of the Company’s ordinary shares on Euronext on the applicable grant dates.
Granted stock options vest over a three-year period with any unexercised stock options
expiring six years after the grant date, with the exception of a designated part of grants made
in July 2001 that have a graded vest of 1/3 (one third) after the first year, 1/3 (one third) after
the second year and 1/3 (one third) in the third year. During 2001, 232,520 options to
purchase ordinary shares were granted to the Board of Management. No options were
exercised during 2001 by members of the Board of Management.
In 2002, options were authorized to purchase up to 6,000,000 ordinary shares, including
a feature whereby eligible employees were given the right to elect to receive options to
purchase ordinary shares in lieu of a percentage of their salary. Options granted under these
plans have fixed exercise prices equal to the closing price of the Company’s ordinary shares
on Euronext on the applicable grant dates. A designated part of the granted stock options
vest over a one year period with any unexercised stock options expiring six years after the
grant date. The remaining part of the granted stock options vest over a three-year period
with any unexercised stock options expiring six years after the grant date.
In 2003, options were authorized to purchase up to 6,000,000 ordinary shares, including
a feature whereby eligible employees were given the right to elect to receive options to
purchase ordinary shares in lieu of a percentage of their salary. Options granted under these
plans have fixed exercise prices equal to the closing price of the Company’s ordinary shares
on Euronext on the applicable grant dates. Granted stock options vest over a three-year
period with any unexercised stock options expiring ten years after the grant date.
In 2002, employees were offered an extension of the option period for options granted in 1997
up to and including 2000. For the years 1997 up to and including 1999, this extension is either
until October 21, 2008, or October 21, 2005. For 2000, the option period is extended until
2012. Employees who accepted the extension became subject to additional exercise periods
in respect of their options and a higher strike price.
Option plans that were issued before 2001 were constructed with a virtual financing
arrangement whereby ASML financed the tax value of the options granted to employees
subject to the Netherlands tax-regime. The loans issued under this arrangement are repayable
to ASML on the exercise date of the respective option, provided that the option was actually
exercised. If the options expire unexercised, the respective loans are forgiven.
F-29ASML ANNUAL REPORT 2003
Legal
Contingencies
The following three tables have not been restated for discontinued operations:
Stock option transactions are summarized as follows:
Number of Weighted average
shares exercise price per share (EUR)
Outstanding, December 31, 2000 17,069,039 28.84
granted 5,883,550 32.78
exercised (1,488,107) 9.75
cancelled (265,212) 23.22
Outstanding, December 31, 2001 21,199,270 26.01
Granted 4,483,070 19.30
exercised (1,539,132) 9.45
cancelled (266,760) 17.46
Outstanding, December 31, 2002 23,876,448 25.13
Granted 2,516,980 9.66
exercised (335,977) 10.98
cancelled (1,486,427) 21.82
Outstanding, December 31, 2003 24,571,024 24.58
Exercisable, December 31, 2003 15,494,969 23.99
Exercisable, December 31, 2002 9,551,860 14.77
Exercisable, December 31, 2001 6,870,466 15.22
Information with respect to stock options outstanding at December 31, 2003 is as follows:
Options Number Number Weighted Weighted
outstanding outstanding exercisable average average
Range of exercise December 31, 2003 December 31, 2003 remaining exercise price
prices (EUR) contractual of outstanding
life (years) options (EUR)
2.35 - 9.29 647,930 177,550 7.91 7.43
9.30 - 12.79 6,134,015 4,087,415 6.03 11.40
12.80 - 31.79 11,692,260 7,285,834 3.56 22.51
31.80 - 47.15 6,096,819 3,944,170 6.30 44.00
Total 24,571,024 15,494,969 4.97 24.58
14. Contingencies
ASML is party to various legal proceedings generally incidental to its business. Since late 2001,
ASML has been a party to a series of litigation and administrative proceedings in which Nikon
alleges ASML’s infringement of Nikon patents relating to photolithography. These are discussed
below. ASML also faces exposure from other actual or potential claims and legal proceedings.
Although the ultimate disposition of these other claims and proceedings cannot be predicted
with certainty, it is the opinion of the Company’s management that the outcome of any such
F-30ASML ANNUAL REPORT 2003
other claim that is pending or threatened, either individually or on a combined basis,
is expected not to have a materially adverse effect on ASML’s consolidated financial condition.
On occasion, certain ASML customers have received notices of infringement from third parties.
These notices allege that the ASML equipment used by those customers in the manufacture of
semiconductor products, and/or the methods relating to use of the ASML equipment, infringes
one or more patents issued to those third parties. ASML has been advised that, if these claims
were successful, it could be required to indemnify such customers for some or all of any losses
incurred or damages assessed against them as a result of that infringement.
The Company accrues for legal costs related to litigation in its statement of operations at the
time when the related legal services are actually provided to ASML.
Ultratech case U.S.
On May 23, 2000, Ultratech Stepper, Inc. (“Ultratech”) filed a lawsuit in the United States
District Court for the Eastern District of Virginia (which was subsequently transferred to the
United States District Court for the Northern District of California) against ASML. Ultratech
alleged that ASML is infringing Ultratech’s rights under a United States patent, through the
manufacture and commercialization in the U.S. of advanced photolithography equipment
embodying technology that, in particular, is used in Step & Scan equipment. Ultratech’s
complaint seeks injunctive relief and damages. On August 16, 2002, the Court granted
ASML’s motion for summary judgment of non-infringement based upon the previously
reported favorable interpretation by the Court as to the scope and meaning of the claims
of the asserted patent. A final judgment on those favorable rulings was subsequently entered
in ASML’s favor and ASML’s challenge to the validity and enforceability of the patent was
dismissed without prejudice in light of the finding of no infringement. Ultratech has taken
an appeal to the United States Court of Appeals for the Federal Circuit from the judgment
in ASML’s favor, where the matter has been briefed and now awaits oral argument and
disposition by the Court.
Management continues to believe that Ultratech’s claims are without merit and that ASML’s
defenses are strong. ASML will continue to assert these defenses vigorously.
Nikon case U.S.
On December 21, 2001, Nikon Corporation (“Nikon”) and two of its United States subsidiaries
filed a so-called Section 337 complaint against ASML with the United States International
Trade Commission (ITC). On January 23, 2002, the ITC instituted an investigation based
on Nikon’s complaint. The complaint in the ITC investigation alleges that ASML’s
photolithography machines imported into the United States infringe seven United States
patents held by Nikon. Nikon’s patents relate to several different aspects of photolithography
equipment. Nikon seeks to exclude the importation of infringing products. ASML believes that
the asserted patents are both not infringed and invalid. A trial before an administrative law
judge on these issues was completed in November 2002.
On January 29, 2003, the administrative law judge (“ALJ”) in the ITC proceedings ruled that
ASML had not violated Section 337. After Nikon and ASML petitioned for review of the ALJ’s
decision by the full Commission, the ITC adopted the ALJ’s decision that ASML did not
infringe any valid, enforceable patent of Nikon’s and had not violated Section 337.
F-31ASML ANNUAL REPORT 2003
Nikon has appealed the ITC’s decision to the United States Court of Appeals for the Federal
Circuit. ASML’s motion to intervene in that appeal was allowed. A decision from the Court
of Appeals in not expected before mid 2004.
On December 21, 2001, Nikon also filed a separate patent infringement action in the
United States District Court for the Northern District of California alleging infringement
of four different Nikon patents and seeking injunctive relief and damages. On March 22, 2002,
Nikon amended its complaint to allege infringement of an additional patent. On April 8, 2002,
ASML answered this complaint denying infringement, asserting affirmative defenses of
invalidity and unenforceability, and alleging counterclaims.
On April 5, 2002, ASML filed a counterclaim in the ITC action alleging that Nikon’s
photolithography machines sold in the United States infringe five ASML patents.
According to ITC procedure, these counterclaims were initially transferred to the United States
District Court for the District of Arizona. On October 17, 2002, these claims were transferred
to the United States District Court for the Northern District of California, where they are now
pending.
On October 18, 2002, Nikon filed a second patent infringement action in the United States
District Court for the Northern District of California alleging infringement of six out of the
seven patents from the ITC action and two additional patents. On December 2, 2002,
ASML answered this second complaint denying infringement of these additional patents
and asserting affirmative defenses of invalidity and unenforceability.
ASML intends to vigorously pursue its claims and believes it has meritorious defenses against
Nikon’s claims. Discovery in the California litigation is currently ongoing; however, trial is not
expected to commence before late 2004. In the event a final non-appealable decision were to
be rendered that was adverse to ASML, it could substantially restrict or prohibit ASML’s sales
(from and into) the United States, which in turn could have a material adverse effect on the
Company’s financial position and results of operations, the amount which currently cannot be
estimated.
Nikon case Japan
On July 8, 2003, Nikon withdrew its counterclaim against ASML filed in October 2002,
alleging that ASML’s photolithography machines infringe 12 Japanese patents held by Nikon.
On November 19, 2003, Nikon filed a new complaint against ASML and its subsidiary in Japan
alleging that ASML’s photolithography machines sold in Japan infringe patents held by Nikon.
This litigation is in the early stage, and a final decision is not expected before 2006. In the
event a final non-appealable decision in the Japanese proceeding was rendered that was
adverse to ASML, it could substantially restrict or eliminate ASML’s ability to achieve future
sales growth in Japan, which could in turn have a material adverse effect on the Company’s
results of operations, the amount which currently cannot be estimated.
The patent infringement action filed by ASML on August 19, 2002, seeking damages
and injunctive relief against Nikon to cease the manufacture and sale of photolithography
machines, and another patent infringement action filed by ASML on January 16, 2003,
seeking injunctive relief against Nikon, are still pending at the Tokyo District Court.
F-32ASML ANNUAL REPORT 2003
Other
Contingencies
The Company expects a decision by the Tokyo District Court on the first mentioned case will
be rendered around the second quarter of 2004. If the decision is adverse to ASML, ASML
may appeal to the Tokyo High Court. In January 2004, ASML filed a new complaint against
Nikon in the Tokyo District Court. Final non-appealable decisions in these cases are not
expected before 2005.
Nikon case Korea
On October 8, 2002, Nikon filed a patent infringement action against ASML and its Korean
subsidiary in the Seoul District Court alleging that ASML’s photolithography machines infringe
five of Nikon’s patents, four of which are related to Nikon’s patents asserted in its U.S.
litigation. The complaint seeks to prohibit ASML from the manufacture, use, sale, import or
export of infringing products, the destruction of the manufacturing facilities for these products
and damages. Exchanges of briefs from both sides have taken place on the preliminary issues;
exchanges of several additional briefs are expected. ASML filed invalidation actions against
two Nikon patents related to this to this District Court action in April 2003 with the Korean
Intellectual Property Office, and the initial exchanges of briefs have occurred.
On January 15, 2003, ASML filed a complaint against Nikon and its Korean subsidiary alleging
that Nikon infringes one of ASML’s patents, seeking injunctive relief against Nikon to cease
the manufacture and sale of lithography devices that infringe ASML’s patent. Nikon Korea
and Nikon Japan filed response briefs denying infringement. Nikon filed an invalidation action
against five ASML patents in July 2003 with the Korean Intellectual Property Office.
ASML submitted a response brief with the Korean Intellectual Property Office on October 13,
2003.
The District Court decisions on the Korean proceedings are not expected before 2005; the
final, non-appealable decisions are not expected before 2006. ASML intends to vigorously
pursue its claims and believes it has meritorious defenses against Nikon’s claims. In the event
that a final non-appealable decision were to be rendered in the Korean proceedings that was
adverse to ASML, it could substantially restrict or eliminate ASML’s sales in Korea, which
could have a material adverse effect on the Company’s results of operations, the amount
which currently cannot be estimated.
ASML has research and development agreements with the government of the Netherlands,
Ministry of Economic Affairs. In previous years, credits were received for research and
development projects relating to new generations of semiconductor lithography systems.
The agreements require that the majority of the amounts received are to be repaid, with
interest, to the extent that product sales occur that relate to the research. The amount of the
repayment due is based on a percentage of the selling price of the product and is charged to
cost of sales when such a sale is recorded.
As of December 31, 2002 and 2003, ASML has contingent obligations totaling EUR 12 million
and EUR 0 million to repay TOK credits received in previous years.
F-33ASML ANNUAL REPORT 2003
15. Research and development credits
ASML receives subsidies and credits for research and development from various sources
as follows:
As of December 31 2001 2002 2003
Netherlands government technology subsidy 15,881 25,981 19,119
Netherlands Ministry of
Economic Affairs (TOKs) credits1 0 0 0
European community and other subsidies 342 34 0
Total subsidies and credits received 16,223 26,015 19,119
1 In 2001, 2002 and 2003, ASML recorded EUR 3.6 million, EUR 36.1 million and EUR 13.8 million, respectively,
for repayment obligations. For the year 2004, there do not remain any future repayment obligations for TOKs.
16. Income taxes
The amounts below include continued and discontinued operations as tax effects arising from
discontinued operations mostly reside and will remain with ASML group companies.
The components of income before income taxes are as follows:
Year ended December 31 2001 2002 2003
Domestic (36,486) (206,001) (288,370)
Foreign (660,734) (108,447) 45,163
Total (697,220) (314,448) (243,207)
The foreign component predominantly relates to the U.S.
The Netherlands domestic statutory tax rate is 34.5 percent. The reconciliation between the
provision for income taxes shown in the consolidated statement of operations, based on the
effective tax rate, and expense based on the domestic tax rate, is as follows:
Year ended December 31 2001 2002 2003
Income tax expense based on
domestic rate (244,027) (108,485) (83,906)
Different tax rates 25,974 12,362 (6,568)
Other credits and non-taxable items (175) (10,502) 7,483
Provision for income taxes shown
in the statement of operations (218,228) (106,625) (82,991)
F-34ASML ANNUAL REPORT 2003
ASML’s provision for income taxes consists of the following:
Year ended December 31 2001 2002 2003
Current
Domestic (28,343) 26 2,307
Foreign 6,002 5,668 17,094
Deferred
Domestic 0 (46,020) (99,426)
Foreign (195,887) (66,299) (2,966)
Total (218,228) (106,625) (82,991)
Deferred tax assets (liabilities) consist of the following:
As of December 31 2002 2003
Tax effect carry-forward losses 230,474 294,534
Inventories 896 49,961
Temporary depreciation investments (133,516) (152,745)
Other temporary differences 78,960 11,185
Total 176,814 202,935
Deferred tax assets (liabilities) are classified in the consolidated financial statements as
follows:
As of December 31 2002 2003
Deferred tax assets – current 0 49,590
Deferred tax assets – non-current 314,795 325,271
Deferred tax liabilities – current (4,465) (2,285)
Deferred tax liabilities – non-current (133,516) (169,641)
Total 176,814 202,935
Deferred tax assets are resulting from net operating loss carry-forwards incurred
predominantly in the U.S. and the Netherlands. Net operating losses qualified as tax losses
under Dutch tax laws incurred by Netherlands group companies can in general be offset for
an indefinite period against future taxable profits. Net operating losses qualified as tax losses
under U.S. federal tax laws incurred by U.S. group companies can in general be offset against
future profits realized in 20 years following the year in which the losses are incurred.
The possibility to carry forward U.S. federal tax losses will expire in the period 2021 through
2023. Net operating losses qualified as tax losses under U.S. state tax laws incurred by
U.S. group companies can in general be offset against future profits realized in 5 to 20 years
following the year in which the losses are incurred. The period of net operating loss
carryforward for U.S. state tax purposes depend on the state in which the tax loss arose.
The possibility to carry forward U.S. state tax losses will expire in the period 2006 through
2023. The total amount of tax loss carried forward as of December 31, 2003 is EUR 842
million. Based on its analysis, management believes that it is more likely than not that all tax
losses will be offset by future taxable income before the statute on loss compensation expires.
The analysis takes into account the projected future taxable income from operations, possible
tax planning alternatives, and the expected outcome of a bi-lateral Advance Pricing Agreement
F-35ASML ANNUAL REPORT 2003
(“APA”) initiated by ASML. Management believes that it is more likely than not
that these negotiations will result in an APA agreement between ASML and the U.S. and
Netherlands tax authorities regarding inter-company transfers of certain tangible and
intangible assets. These transactions are the result of the realignment of group operations.
The APA negotiations are expected to be finalized before the end of 2004.
Pursuant to Netherlands tax laws, ASML has temporarily depreciated part of its investment
in its U.S. group companies. This depreciation has been deducted from the taxable base in
The Netherlands. The depreciation resulted in a – temporary – tax refund of EUR 152 million.
This temporary depreciation must be added back on a straight-line basis to the taxable base
in the period 2006 through 2010. The net tax effect of this repayment obligation, amounting to
EUR 152 million, is recorded as a long-term deferred tax liability in the Company’s financial
statements.
17. Segment disclosure
Segment information has been prepared in accordance with SFAS No. 131, “Disclosures
about Segments of an Enterprise and Related Information”.
The Company has only one reporting segment in continuing operations: lithography.
ASML markets and sells its products in the United States, Europe and Asia principally
through its direct sales organization. ASML makes all its sales into the United States through
its U.S. subsidiary and its sales into Asia primarily through its Hong Kong subsidiary.
F-36ASML ANNUAL REPORT 2003
Board of
Management
The following table summarizes net sales, operating income and identifiable assets of ASML’s
operations in Asia, Europe and the United States, the significant geographic areas in which
ASML operates.
Asia Europe United States Eliminations Consolidated
2001
Net sales to
unaffiliated customers 742,697 150,127 696,423 0 1,589,247
Inter-company sales 0 1,106,485 0 (1,106,485) 0
Total net sales 742,697 1,256,612 696,423 (1,106,485) 1,589,247
Operating income (loss) (48,024) 39,634 (544,811) (37,417) (590,618)
Identifiable assets 365,918 3,141,398 825,591 (941,090) 3,391,817
2002
Net sales to
unaffiliated customers 1,066,476 190,196 702,000 0 1,958,672
Inter-company sales 0 1,580,790 27,971 (1,608,761) 0
Total net sales 1,066,476 1,770,986 729,971 (1,608,761) 1,958,672
Operating income (loss) 5,569 (84,460) 30,392 (45,544) (94,043)
Identifiable assets 438,976 3,360,456 630,824 (1,248,732) 3,181,524
2003
Net sales to
unaffiliated customers 762,384 220,190 560,163 0 1,542,737
Inter-company sales 26,897 1,212,740 54,331 (1,293,968) 0
Total net sales 789,281 1,432,930 614,494 (1,293,968) 1,542,737
Operating income (loss) 5,038 (224,608) 95,404 (30,866) (155,032)
Identifiable assets1 611,477 3,332,335 565,531 (1,660,658) 2,848,685
1Includes as of December 31, 2003, identifiable long-lived assets for a total of EUR 703,865 divided over Asia forEUR 22,043, for Europe EUR 1,635,371 and for the United States EUR 380,488 and taking into accounteliminations of EUR 1,334,037.
Assets, liabilities and capital expenditures by geographical area are not evaluated by executive
management and are not used for the purpose of making decisions about allocating resources
to the segment or assessing its performance.
18. Board of Management and Supervisory Board remuneration
The total remuneration and related costs (in euro) of the members of the Board of
Management can be specified as follows:
Year ended December 31 2001 2002 2003
Salaries 2,187,000 2,016,000 1,912,966
Bonuses 0 0 1,052,1311
Pension cost 172,000 263,000 212,058
Total 2,359,000 2,279,000 3,177,155
1 The statement of operations for the year ended December 31, 2003 includes an accrual for bonuses of EUR1,052,131 expected to be paid in the first quarter of 2004 to the Board of Management.
F-37ASML ANNUAL REPORT 2003
The 2003 remuneration and related costs (in euro, except for Mr. Chavoustie, which is in USD)of the individual members of the Board of Management was as follows:
Salary1 Bonus2 Total
D.J. Dunn 590,000 324,500 914,500
P.T.F.M. Wennink 300,000 165,000 465,000
M.A. van den Brink 375,000 206,250 581,250
S.K. McIntosh 355,000 195,250 550,250
D.P. Chavoustie3 370,000 203,500 573,500
1 Salaries for 2003 were equal to the salaries paid in 2002.2 The statement of operations for the year ended December 31, 2003 includes an accrual for bonuses expected to
be paid in the first quarter of 2004 to the Board of Management.3 Amounts in USD
ASML has a performance-related bonus plan for the Board of Management. Under this plan,
the ultimate bonus amount is dependent on the actual achievement on corporate targets.
These targets are market share, financial and operational performance parameters relating to
return on invested capital parameters.
The 2003 vested pension benefit1 (in euro, except for Mr. Chavoustie, which is in USD)
of individual members of the Board of Management were as follows:
D.J. Dunn 85,082
P.T.F.M. Wennink 30,323
M.A. van den Brink 38,198
S.K. McIntosh 50,537
D.P. Chavoustie2 10,000
1 Since the pension arrangement for members of the Board of Management is a defined contribution plan, the Company does not have further pension obligations beyond the annual premium contribution.
2 Amount in USD
F-38ASML ANNUAL REPORT 2003
Details of options held by members of the Board of Management to purchase ordinary shares
of ASML Holding N.V. are set forth below:
Jan 1, Granted Exercised Dec. 31, Exercise Share Expiration
2003 during during 2003 price price on date
2003 2003 exercise
date
D.J. Dunn 600,000 - 600,000 17.51 - 01-04-2005
67,500 - 67,500 58.00 - 20-01-2012
30,000 - 30,000 40.40 - 22-01-2007
30,000 - 30,000 20.28 - 21-01-2008
30,000 - 30,000 7.02 - 22-04-2013
P.T.F.M. Wennink 30,000 - 30,000 11.05 - 01-01-2005
31,500 - 31,500 58.00 - 20-01-2012
15,660 - 15,660 40.40 - 22-01-2007
50,000 - 50,000 29.92 - 22-01-2007
20,960 - 20,960 22.12 - 20-07-2007
20,000 - 20,000 20.28 - 21-01-2008
20,000 - 20,000 7.02 - 22-04-2013
M.A. van den Brink 21,600 - 21,600 14.87 - 21-01-2005
31,500 - 31,500 58.00 - 20-01-2012
19,860 - 19,860 40.40 - 22-01-2007
26,560 - 26,560 22.12 - 20-07-2007
20,000 - 20,000 20.28 - 21-01-2008
20,000 - 20,000 7.02 - 22-04-2013
D.P. Chavoustie 60,000 - 60,000 15.24 - 20-10-2005
30,000 - 30,000 10.42 - 20-10-2005
46,800 - 46,800 14.87 - 20-10-2005
67,500 - 67,500 56.48 - 20-01-2012
25,500 - 25,500 29.92 - 22-01-2007
30,240 - 30,240 22.12 - 20-07-2007
20,000 - 20,000 20.28 - 21-01-2008
20,000 - 20,000 7.02 - 22-04-2013
S.K. McIntosh 21,000 - 21,000 40.40 - 22-01-2007
250,000 - 250,000 29.92 - 22-01-2007
28,080 - 28,080 22.12 - 20-07-2007
20,000 - 20,000 20.28 - 21-01-2008
20,000 - 20,000 7.02 - 22-04-2013
F-39ASML ANNUAL REPORT 2003
Supervisory
Board
During 2002 and 2003, the individual members of the Supervisory Board received the following
remuneration (in euro):
Year ended December 31 2002 2003
H. Bodt 40,000 40,000
P.H. Grassmann 25,000 25,000
S. Bergsma 25,000 25,000
A. Westerlaken1 25,000 0
J.A. Dekker 25,000 25,000
M.J. Attardo2 25,000 25,000
J.W.B. Westerburgen3 0 25,000
1 Membership ended March 21, 2002, 2 M.J. Attardo owns 34,722 options on shares of the Company. 3 Membership started March 21, 2002.
Members of the Board of Management and/or Supervisory Board are free to acquire or
dispose of ASML shares or options for their own account, provided they comply with the
ASML Insider Trading Rules 2002. Those securities are not part of members’ remuneration
from the Company and are therefore not included.
19. Selected operating expenses and additional information
Personnel expenses for all employees were:
Year ended December 31 2001 2002 2003
Wages and salaries 413,011 371,281 326,6781
Social security expenses 33,412 31,897 24,640
Pension and retirement expenses 24,137 22,324 23,150
Total 470,560 425,502 374,468
1 The average wages and salaries per average number of employees decreased in 2003 compared to 2002 as aresult of the decline in the USD versus the euro during 2003.
The average number of employees from continuing operations during 2001, 2002 and 2003
was 6,434, 5,640 and 5,323, respectively (excluding non-payroll employees). The total number
of personnel employed per sector was:
F-40ASML ANNUAL REPORT 2003
Cumulative
preference
shares
As of December 31 2001 2002 2003
Marketing & Technology 1,689 1,708 1,507
Goodsflow 1,526 1,416 1,184
Customer Support 1,964 2,090 1,717
General 716 588 518
Sales 144 169 133
Total continuing operations 6,039 5,971 5,059
Total discontinued operations 1,031 712 1191
Total number of employees
(including non-payroll employees) 7,070 6,683 5,178
1 As of January 1, 2004, these employees are transferred to newly incorporated companies of the buyer of ASML’sThermal business.
In 2001, 2002 and 2003, a total of 2,972, 2,857 and 2,649 employees in the Company’s
continuing operations (excluding non-payroll employees), respectively, were employed in
the Netherlands.
20. Vulnerability due to certain concentrations
ASML relies on outside vendors to manufacture the components and subassemblies used in
its systems, each of which is obtained from a sole supplier or a limited number of suppliers.
ASML’s reliance on a limited group of suppliers involves several risks, including a potential
inability to obtain an adequate supply of required components and reduced control over
pricing and timely delivery of these subassemblies and components. In particular, the number
of systems ASML has been able to produce has occasionally been limited by the production
capacity of Zeiss. Zeiss is currently ASML’s sole external supplier of lenses and other critical
optical components and is capable of producing these lenses only in limited numbers and
only through the use of its manufacturing and testing facility in Oberkochen, Germany.
ASML sells a substantial number of lithography systems to a limited number of customers.
In 2003, sales to one customer accounted for EUR 314 million or 20 percent of net sales.
In 2002, sales to one customer accounted for EUR 377 million, or 19 percent of net sales.
As a result of the limited number of customers, credit risk on receivables is concentrated.
ASML’s three largest customers accounted for 44 percent of accounts receivable at December
31, 2003, compared to 42 percent at December 31, 2002. Business failure of one of ASML’s
main customers may result in adverse effects on its business, financial condition and results
of operations.
21. Capital stock
In 1998 as extended in 2003, the Company has granted to the preference share foundation,
“Stichting Preferente Aandelen ASML” (the “Foundation”) an option to acquire cumulative
preference shares in the capital of the Company (the “Preference Share Option”).
The object of the Foundation is to protect the interests of the Company and the enterprises
maintained by it. The cumulative preference shares have the same voting rights as ordinary
F-41ASML ANNUAL REPORT 2003
Declaration of
Independence
Priority shares
shares but are entitled to dividends on a preferential basis at a percentage based on the
average official interest rate determined by EURIBOR plus 2 percent.
The Preference Share Option gives the Foundation the right to acquire a number of cumulative
preference shares equal to the number of ordinary shares outstanding at the time of exercise
of the cumulative preference share option for a subscription price equal to their EUR 0.02
nominal value. Only one-fourth of this subscription price is payable at the time of initial
issuance of the cumulative preference shares. The cumulative preference shares may be
cancelled and repaid by the Company upon the authorization by the General Meeting of
Shareholders of a proposal to do so by the Board of Management approved by the
Supervisory Board and the Meeting of Priority Shareholders. Exercise of the Preference Share
Option would effectively dilute the voting power of the ordinary shares then outstanding by
one-half. The practical effect of any such exercise could be to prevent attempts by third
parties to acquire control of the Company.
The Board of Directors of the Foundation and the Board of Management of the Company
together declare that the Foundation is independent of the Company as defined in article A2bI
of “Bijlage X bij het Fondsenreglement van Euronext Amsterdam.” The Board of the
Foundation comprises three voting members from the Netherlands business and academic
communities, Mr. R.E. Selman, Mr. F.H.M. Grapperhaus and Mr. M.W. den Boogert, and one
non-voting member, the Chairman of the Company’s Supervisory Board, Mr. H. Bodt.
The priority shares are held by the “Stichting Prioriteitsaandelen ASML Holding N.V.”,
a foundation having a self-elected board that must consist solely of members of the
Company’s Supervisory Board and Board of Management.
As of December 31, 2003, the board members were:
• Doug J. Dunn
• Henk Bodt
• Syb Bergsma
• Jan A. Dekker
• Peter T.F.M. Wennink
An overview of the other functions held by above persons can be obtained at the Company’s
office. In the joint opinion of the Company and the foregoing members of the board of the
priority share foundation, the composition of the board conforms with Appendix X,
Article C.10 of the Listing and Issuing Rules of the Euronext Amsterdam. 1
The priority shares are not entitled to dividends but have a preferred right over all other
outstanding preferred and ordinary shares on the return of their nominal value in the case
of winding up the Company. Holders of priority shares are required to approve certain
significant corporate decisions and transactions of the Company. These decisions and
transactions encompass, but are not limited to, amendment of the Articles of Association,
winding up of the Company, issuance of shares, limitation of pre-emptive rights and
repurchase and cancellation of shares.
Veldhoven, January 30, 2004
F-42ASML ANNUAL REPORT 2003
Adopted by
The Board of Management:
Doug J. Dunn
Peter T.F.M. Wennink
Martin A. van den Brink
David P. Chavoustie
Stuart K. McIntosh
Approved by
The Supervisory Board:
Henk Bodt
Syb Bergsma
Michael J. Attardo
Peter H. Grassmann
Jos W.B. Westerburgen
Jan A. Dekker
1 Article C10 states that the issuer shall ensure that not more than half of the priority shares are being held bymanaging directors of the issuer or, where the priority shares are held by a legal entity, that no more thanhalf of the number of votes to be exercised in meetings of the foundation in which decisions are made aboutthe exercise of the voting rights of the priority shares, can be exercised, directly or indirectly, by persons who arealso managing directors of the issuer.
F-43ASML ANNUAL REPORT 2003
Independent Auditors’ Report
To the Supervisory Board, Board of Management and Shareholders of ASML Holding N.V.
Veldhoven, the Netherlands
We have audited the accompanying consolidated balance sheets of ASML Holding N.V.
and its subsidiaries (collectively, the “Company”) as of December 31, 2002 and 2003,
and the related consolidated statements of operations, comprehensive income, shareholders’
equity and cash flows for each of the three years in the period ended December 31, 2003
(all expressed in euros). These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2002 and 2003, and the results of
its operations, comprehensive income and its cash flows for each of the three years in the
period ended December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America.
Eindhoven, the Netherlands
January 30, 2004
F-44ASML ANNUAL REPORT 2003
Exhibit Index
Exhibit No. Description
1 Articles of Association of ASML Holding N.V. (English translation) (Incorporated
by reference to Amendment No. 6 to the Registrant’s Registration Statement
on Form 8-A/A, filed with the Commission on June 18, 2002 (File No. 0-25566))
2.1 Paying Agent, Conversion Agent and Registrar Agreement between ASML
Holding N.V. and the Bank of New York relating to the Registrant’s 5.75%
Convertible Subordinated Notes due 2006 (Incorporated by reference to Exhibit
2.3. of the Registrant’s Annual Report on Form 20-F for the year ended
December 31, 2001)
2.2 Paying Agent, Conversion Agent and Registrar Agreement between ASML
Holding NV and the Bank of New York relating to the Registrant’s 5.50 percent
Convertible Subordinated Notes due 2010*
4.1 Agreement between ASML Lithography B.V. and Carl Zeiss, dated March 17,
2000 (Incorporated by reference to the Registrant’s Annual Report on Form 20-
F for the fiscal year ended December 31, 2000)
4.2 Agreement between ASML Holding N.V. and Carl Zeiss, dated October 24,
2003*
4.3 Form of Indemnity Agreement between ASML Holding N.V. and members of its
Board of Management*
4.4 Form of Indemnity Agreement between ASML Holding N.V. and members of its
Supervisory Board*
4.5 Employee Agreement between ASML Holding N.V. and Doug J. Dunn*
4.6 Employee Agreement between ASML Holding N.V. and Stuart K. McIntosh*
4.7 Employee Agreement between ASML Holding N.V. and David P. Chavoustie*
4.8 Form of Employee Agreement for members of the Board of Management*
4.9 ASML New Hires and Incentive Stock Option Plan For Management
(Version 2003) (Incorporated by reference to exhibit 4.4 to the Registrant’s
Statement on Form S-8, filed with the Commission on September 2, 2003
(File No. 333-109154)
8.1 List of Subsidiaries*
12.1 Certification of CEO and CFO Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934*
13.1 Certification of CEO and CFO Pursuant to Rule 13a-14(b) of the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*
14.1 Consent of Deloitte & Touche*
*Filed at the Commission herewith
Exhibit 8.1
List of subsidiaries
Legal Entity Country of Incorporation
100% Subsidiary ASML Holding N.V.:
ASML Netherlands B.V. Netherlands (Veldhoven)
ASML Finance B.V. Netherlands (Veldhoven)
ASML MaskTools B.V. Netherlands (Veldhoven)
ASML Subholding B.V. Netherlands (Veldhoven)
ASML Germany GmbH Germany (Dresden)
ASML S.a.r.l. France (Montbonnot)
ASML (UK) Ltd. UK (Paisley (Scotland))
ASML Information Systems Ltd Israel (Ramat-Gan)
ASML Ireland Ltd. Ireland (Dublin)
ASML Italy S.r.l. Italy (Avezzano)
ASML Hong Kong Ltd. Hong Kong SAR
ASML Singapore Pte. Ltd. Singapore
ASML Korea Co. Ltd. Korea (Kyunggi-Do)
ASML Japan Co. Ltd. Japan (Kawasaki-shi, Kanagawa-Ken)
ASML Shanghai Int. Trading Co. Ltd. China/ Shanghai Free Trade Zone
ASML (China) Co. Ltd. China (Tianjin)
ASML Taiwan Ltd. Republic of China (Hsinchu)
ASML Equipment Malaysia Sdn. Bhd. Malaysia (Penang)
ASML US, Inc US (Delaware)
100% Subsidiary ASML US, Inc.:
ASML Capital US, Inc. US (Delaware)
SVG International Service US (California)
Lehrer Pearson, Inc. US (Delaware)
ASML MaskTools Inc. US (Delaware)
ASML Participations US, Inc. US (Delaware)
33% Subsidiary ASML US, Inc.:
Axiomatic Design Software, Inc. US (Delaware)
100% Subsidiary ASML Subholding B.V.:
ASML-Micronic Joint Venture Company, Ltd. Ireland (Dublin)
100% Subsidiary ASML (UK) Ltd:
SVG Europe Ltd. UK (Radlett)
100% Subsidiary SVG Europe Ltd.:
ASML Radlett Ltd UK (Radlett)
100% Subsidiary ASML Radlett Ltd.:
SVG Thermal (UK) Ltd. UK (Radlett)
100% Subsidiary ASML Hong Kong Ltd.:
ASML Macau Commercial Offshore Ltd. Macau
50% Subsidiary ASML Participations US, Inc.:
eLith LLC US (Delaware)
ASML ANNUAL REPORT 2003
ASML ANNUAL REPORT 2003
Exhibit 10.2
Deloitte & Touche
Accountants
Flight Forum 1
5657 DA Eindhoven
P.O. Box 782
5600 AT Eindhoven
The Netherlands
Tel: +31 (40) 2345000
Fax: +31 (40) 2345407
www.deloitte.nl
ASML Holding N.V.
De Run 6501
5504 DR Veldhoven
Date From
January 30, 2004 J.G.C.M. Buné
Consent of independent auditors
We consent to the incorporation by reference, in the following Registration Statements
on Form S-8 (No. 333-13332, No. 33-109154, 333-105600), of ASML Holding. N.V.
(the "Company") and in the related Prospectuses, of our report dated January 30, 2004
included in the Financial Statements on Form 20-F of the Company for the year ended
December 31, 2003.
/s/ Deloitte & Touche Accountants
Exhibit 12.1
Certification of the Chief Executive Officer
I, Doug J. Dunn, certify that:
1. I have reviewed this annual report on Form 20-F of ASML Holding N.V.;
2. Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statement made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the company as of, and for, the periods presented in this
report;
4. The company's other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) for the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the company, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the company’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
c) Disclosed in this report any change in the company’s internal control over financial
reporting that occurred during the period covered by the annual report that has materially
affected, or is reasonably likely to materially affect, the company’s internal control over
financial reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the company’s auditors and the
audit committee of the company's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
company’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the company’s internal control over financial reporting.
Date: January 30, 2004
/s/ Doug J. Dunn,
Chief Executive Officer
ASML ANNUAL REPORT 2003
ASML ANNUAL REPORT 2003
Certification of the Chief Financial Officer
I, Peter T.F.M. Wennink, certify that:
1. I have reviewed this annual report on Form 20-F of ASML Holding N.V.;
2. Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statement made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the company as of, and for, the periods presented in this
report;
4. The company’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) for the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the company, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the company’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
c) Disclosed in this report any change in the company’s internal control over financial
reporting that occurred during the period covered by the annual report that has materially
affected, or is reasonably likely to materially affect, the company’s internal control over
financial reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the company’s auditors and the
audit committee of the company's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
company’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the company’s internal control over financial reporting.
Date: January 30, 2004
/s/ Peter T.F.M. Wennink
Chief Financial Officer
Exhibit 13.1
Certification of CEO and CFO Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
In connection with the Annual Report on Form 20-F of ASML Holding N.V. (the “Company”)
for the fiscal year ended December 31, 2003 as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), Doug Dunn, as Chief Executive Officer of the
Company, and Peter T.F.M. Wennink, as Chief Financial Officer of the Company, each hereby
certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/Doug J. Dunn
Name: Doug J. Dunn
Title: Chief Executive Officer
Date: January 30, 2004
/s/Peter T.F.M. Wennink
Name: Peter T.F.M. Wennink
Title: Chief Financial Officer
Date: January 30, 2004
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act
of 2002 has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
This certification accompanies the Report pursuant to section 906 of the Sarbanes-Oxley Act
of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be
deemed filed by the Company for purposes of section 18 of the Securities Exchange Act
of 1934.
ASML ANNUAL REPORT 2003
ASML ANNUAL REPORT 2003
Recommended